Since emerging from the COVID-19 pandemic, investors have faced a series of geopolitical shocks, including supply chain bottlenecks, rampant inflation, major wars and trade conflicts.
According to a new report from PGIM, these events may signal a heightened level of global risk not seen in decades. Despite this, the asset manager revealed that Asia-Pacific stands out for its confidence in portfolio readiness.
Namely, 38 per cent of APAC institutional investors felt that their portfolio is ready to face supply chain disruption. This confidence was also mirrored in their readiness for trade subsidies and disputes (38 per cent) and global migration crises (32 per cent).
“While it may not be possible to fully mitigate the impact of potential geopolitical risk scenarios, a well-diversified and dynamic asset allocation process nimble enough to capitalise on short-term dislocations can help portfolios ‘weather the storm’ across potential scenarios,” Mao Dong, co-head of portfolio management at PGIM Portfolio Advisory, said.
Moreover, a third of APAC investors said they have already adjusted their risk tolerance to geopolitical risk, while just nearly a third (30 per cent) are choosing to hold onto cash or other short-term investments.
“Investors are also more prone to seek liquidity in advance of an unpredictable presidential election, seeing the benefits of maintaining dry powder until there is greater clarity over the path for federal policies,” the report highlighted.
The report also revealed that 26 per cent of APAC institutional investors plan to make adjustments to regional or country allocations to mitigate risk. Consequently, investors are identifying pockets of value across sectors and regions as winners amid the ongoing transformation of global trade.
PGIM added that as global power dynamics continue to evolve, increased engagement with scenario analysis is warranted.
“By stress-testing portfolios, investors can assign probabilities to tail risks and determine potential or likely impacts in a variety of geopolitical scenarios. This strategy can help determine a portfolio’s vulnerabilities and mitigate risk from both high- and low-probability events,” the firm said.
“While geopolitical strife calls for rethinking risk management, shocks may appear too frequent, and too great in number, to effectively mitigate their impact.
“But with the right strategies, investors can construct portfolios with the goal of remaining resilient and capturing emerging opportunities in a new era of geopolitical uncertainty.”
