Can global equities provide benefits in any political or geopolitical environment?

Kondi Nkosi

The uncertainty created by political and geopolitical events does not diminish the opportunities that may be found by overcoming a domestic market bias and gaining exposure to regions, sectors and companies that can thrive amid disruption.

Current political circumstances and geopolitical events can always provide reasons for investors to think twice about diversifying globally. But is that thinking valid? A closer inspection reveals it may not be.

Even before this year’s political news took shape, investors may have been concerned about the extreme concentration of global equities. The outsized performance of the “Magnificent Seven” (Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla) has left the US equity market focused on a small group of mega-cap tech companies, while their performance has also left major global equity indexes – like the MSCI All Country World Index – highly concentrated in the US. All of that can understandably leave some investors feeling convinced they should stay focused on their local markets.

The current political and geopolitical turmoil only provides further reasons to consider maintaining a domestic bias. The daily headlines are filled with ominous news about tariffs. Even though negotiated solutions to the Ukraine-Russia war and the conflict between Israel and Hamas might be possible, the overall global state of geopolitical tension remains heightened.

Do all these factors provide sufficient reasons for investors to avoid or minimise exposure to global equities? In our view, they do not, and in fact there are plenty of reasons to stay globally diversified regardless of how much uncertainty current politics or geopolitical developments create.

1. The impact of tariffs is not uniformly negative across all regions and all sectors

Increased US tariffs affect economies around the globe, and they could lead to a greater weaponisation of trade in the pursuit of political objectives. While both the Trump administration’s policies and other countries’ reactions to them have continuously evolved, the flurry of news may make US investors reluctant to consider expanding global allocations amidst the turmoil of these trade wars.

A key point to remember, though, is that not all countries will be affected similarly. Some regions, and leading companies within them, could benefit from the disruption the trade battles create. As evidence of this, amid the US-China trade conflict that played out during the first Trump administration, a number of “bystander countries” – including Vietnam, Thailand, South Korea and Mexico – were able to increase their exports to the US by offering substitutes or complementary products for those that China had previously been providing. An active global equities portfolio manager, without the requirement to match the country weights of a benchmark index, has the flexibility to both take advantage of the opportunities and mitigate the risks created by the reconfiguration of the global trade landscape.

Further, sectors and companies that have a more domestically focused market will be shielded from much of the tension with international trade. While some large-cap companies serve their own markets primarily, that domestic focus is even more pronounced among small- and mid-cap companies. Again, active managers without any market-cap restrictions have the freedom to consider all those opportunities.

(Our investment and economics teams are providing regular updates on the implications of the tariffs proposed by the second Trump administration. Read some of their recent insights in Who is at risk from tariffs and what do they mean for equity markets? and Trump's on-off tariffs: the potential effects in the US and elsewhere.)

2. Geopolitical events often have only a short-term impact on equity markets

Major events, such as the September 11, 2001 terrorist attacks against the United States or Russia’s invasion of Ukraine, often cause an immediate, major market downturn. But historically, the drop after such events has not lasted long, even for the world’s largest equity market in the United States. (See Figure 1). It does not appear that such events warrant a complete reconsideration of any long-term investment strategies, including global diversification.

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