By Mario Marroquin
The ongoing war in the Ukraine and the rapidly evolving
geopolitics in the East China Sea have made it clear to global investors that the
distinction between politics and macroeconomics will be harder to parse for
years to come.
At a board meeting of the California Public Employees
Retirement System (CalPERS) this week, Michael Cembalest, chairman of market
and investment strategy for JPMorgan Asset Management, and Matt Gertken, chief strategist,
geopolitical and U.S. political strategy at BCA Research, discussed downstream
effects of sovereign strategies on global investors, and warned that
country-specific risks will play bigger roles on global investment strategies
than they have in decades prior.
From the energy crisis in Europe due to the war in the
Ukraine, and the souring Sino-American trade relations, there is a trend of
deglobalization and reshoring already making waves through nation states and
being felt in the financial markets, the panelists agreed.
But the effect of nation state restrictions on trade, and
their respective effects on investment flows, is much harder to predict due to
the number of possibilities.
“Unfortunately, for most of the last 35 years, sitting on
pins and needles about geopolitical risk would not have made you much money,”
Cembalest said. “This time, it did.”
“Most of the stuff I read ended up being wrong; it projected
the Russians were just posturing for leverage… but here we are.”
Both Cembalest and Gertken agree the wave of reshoring and
deglobalization has evolved alongside the evolution of trade relations amongst the
U.S., Europe, China, India and Russia. But there is a far different tone in the
global financial markets after the COVID-19 pandemic and in the energy markets
underpinning these global economies.
“We‘re in a world where the context is shifting away from
globalization and peace and prosperity, and towards something that isn’t good,”
Gertken said. “It doesn’t necessarily mean collapse into World War III –
hopefully it does not – but we are in a transition phase.
“Country effects, or country risks, will become central to
the analysis of economic and financial markets.”
Members of the CalPERS board went back and forth with Cembalest
and Gertken over the risk U.S.-China relations present to investors in East
Asia and paid special attention to each nation’s policy with respect to Taiwan.
The panelists agreed there is a perception of a higher risk
to global investors in Taiwan in light of the state of the Chinese financial
markets but said there is a substantive level of uncertainty in such
discussions, which are somewhat theoretical.
Geopolitical analysis is becoming endemic to investors,
Gertken said, and establishing a framework to analyze politics and
macroeconomics will be more important to global investors going forward.
On the other hand, Cembalest argued the viability of policy objectives
in the West, such as the transition to renewable energy, largely rests on Chinese
rare earth metals and Chinese manufacturing. Cembalest said reshoring in the U.S.
may yield positive returns for some, but there is still value to be added in
emerging market investment.
“We have been overweight in the U.S. and emerging markets
and underweight in Europe and Japan; that has paid dividends in 26 out of 30
years,” Cembalest said. “There’s a lot of reasons I can give for why that has
worked. And a lot of the time, the reasons are different.”
“I still have the view that emerging markets can play an important role as a complement to U.S. equities. It has been the best returning pillar, whether it is manager selection, securities selection, currency, duration, management; it has been the biggest single consistent returning component of the portfolio.”
