Tussle between globalization, nationalism creates new risks for investors, PGIM says
May 09 2018 - 9:00AM
Business Wire
The escalating tussle between globalization and nationalism
could have profound implications for global financial markets,
traditional investment frameworks and developed market geopolitical
risk analysis, says a new report from PGIM, Inc., the investment
management business of Prudential Financial, Inc. (NYSE: PRU).
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Never before in human history have people, information and
capital moved across borders at the speed, frequency and volume
seen today. These global forces have blunted the ability of
individual sovereign states to shape their own economic destinies,
giving rise to a surge of nationalism in response.
In The End of Sovereignty? PGIM argues that traditional monetary
and fiscal policy frameworks may be inadequate to understand the
shifting global landscape.
“Successful long-term investors who navigate this environment
will place developed market geopolitical risk high on their agenda
when making investment decisions,” said Taimur Hyat, chief strategy
officer for PGIM. “Investors will want managers who understand how
to separate political theater from true political risk that can
move financial markets.”
PGIM identifies five ways investors can rethink their investment
approach:
- Decrease reliance on top-down
country-level factors, which have a diminishing role in driving
equity, corporate debt and real estate returns. Continuing
their steady decline, country-level factors now account for only 20
percent of global equity returns, for example.
- Apply a global framework for all
investment decisions. Regional stock index performance is no
longer solely determined by local economic growth; for example, 40
percent of S&P 500 company sales occurred outside the U.S. over
the last decade. Investors must consider the impact that decisions
taken around the globe will have on their domestic investment
portfolios.
- Ensure developed market risk is
embedded in decisions. The 2016 Brexit vote left many investors
scrambling to evaluate their exposure to the U.K. Investors should
work with their asset managers and consultants to understand their
true regional exposures; at a minimum, investors will want to
ensure they have access to local, on-the-ground expertise to stay
abreast of rising geopolitical tensions.
- Position the portfolio for greater
volatility and uncertainty. Long-term investors should be wary
of traditional measures of risk, that may not fully capture the
potential costs of low-probability, high-risk events. Investors
might look at firms’ geographic makeup to measure country- or
region-specific economic exposure, and potentially consider
targeted use of tail risk hedging strategies.
- Prepare to be viewed as an agent of
change on global challenges. In an era of diminishing sovereign
influence, civil society will increasingly look to asset owners and
managers to act as agents of change on cross-country issues.
“What’s unique to this current phase of globalization is the
acceleration of capital and information flows, which makes it
harder than ever for governments to keep pace with the
opportunities and challenges that result,” said Nathan Sheets, head
of global macroeconomic research at PGIM Fixed Income. “Investors
need to understand how companies might benefit from globalization
or withstand backlash by a sovereign actor.”
Download PGIM’s latest white paper: The End of Sovereignty?
About PGIM and Prudential Financial,
Inc.
With 15 consecutive years of positive third-party institutional
net flows, PGIM, the global asset management businesses of
Prudential Financial, Inc. (NYSE: PRU), ranks among the top 10
largest asset managers in the world3 with $1.2 trillion in assets
under management as of March 31, 2018. PGIM’s businesses offer a
range of investment solutions for retail and institutional
investors around the world across a broad range of asset classes,
including fundamental equity, quantitative equity, public fixed
income, private fixed income, real estate and commercial mortgages.
Its businesses have offices in 16 countries across five continents.
For more information, please visit pgim.com.
Prudential’s additional businesses offer a variety of products
and services, including life insurance, annuities and
retirement-related services. For more information about Prudential,
please visit news.prudential.com.
0507-0800
1. UNCTAD (United Nations Conference on Trade and Development),
World Investment Report 2013: Global Value Chains: Investment and
Trade for Development, United Nations Publication, 2013.
<http://unctad.org/en/PublicationsLibrary/wir2013_en.pdf>;
ILO (International Labour Organization) (2015) World Employment and
Social Outlook. ILO, Geneva.2. Gupta, Abhishek, and Subramanian,
Madhu, “Economic Exposure in Global Investing: Tilting Portfolios
Based on Macroeconomic Views,” MSCI, October 2014; Silverblatt,
Howard, “S&P 500 2016: Global Sales,” S&P Down Jones
Indices, July 2017; S&P data.3. As ranked in Investment &
Pensions Europe Top 400 Asset Managers list, June 2017; based on
PFI total worldwide assets under management as of December 31,
2016.
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version on businesswire.com: https://www.businesswire.com/news/home/20180509005139/en/
Media:For PGIMTed Smith,
973-367-5604ted.smith@pgim.com
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