As globalization unravels, a Cold War is beginning to take shape, with China replacing the Soviet Union as the main U.S. antagonist. New technologies will become key weapons, requiring new investor strategies. In a January study of global CEOs, the EY professional-services firm found that 98% of respondents said they were taking action because of factors related to geopolitics, such as international disputes. A Bank of New York Mellon survey found that 49% of family offices listed geopolitics and cybersecurity among their top concerns. Dave Bianco from DWS Group notes that geopolitical risk is higher for investors, especially since difficult relations between China and the U.S. have worsened.
Military actions in various parts of the world, inflation from the Covid-19 pandemic, climate change, and cyberterrorism are creating a world fraught with risk. Some experts suggest that we may be entering a new type of Cold War. While the knee-jerk reaction on Wall Street has always been to invest in major aerospace and defense companies, the shift towards technology as a key battlefront may require a new approach. Shorter supply chains and increased national self-reliance, especially in energy, are also becoming important considerations for investors in this uncertain geopolitical landscape.
John O’Connor of J.H. Whitney Investment Management highlights the reversal of globalization and the transition to a multipolar world. Whitney is collaborating with DWS to provide geostrategic risk ratings for stocks, which have been incorporated into the Xtrackers U.S. National Critical Technologies ETF. This ETF focuses on large and mid-cap stocks in critical industries identified by the U.S. Department of Defense. The ETF includes companies that are considered crucial for national competitiveness, with a focus on technology and defense sectors. The ETF has shown modest returns since its debut.
Investors in Europe are also showing interest in defense assets, with new ETFs catering to this demand. VanEck’s Defense ETF avoids controversial weapons and emphasizes defense-related activities. BlackRock’s iShares Global Aerospace & Defence ETF takes a traditional approach by investing in aerospace and defense contractors based on a standard index. The Future of Defence ETF focuses on European spending on defense, with a significant portion allocated to U.S. companies. These ETFs offer different strategies for investors looking to navigate the changing geopolitical landscape.
As deglobalization continues, businesses are faced with the challenge of adapting to a more complex world. EY has outlined four scenarios for 2027, including Globalization Lite, Friends First, Cold War II, and Self-Reliance Reigns. The most likely scenarios are Friends First and Cold War II, with countries focusing on doing business with friendly nations and China emerging as a major global player. Companies are already making fundamental changes to adjust to deglobalization, such as altering supply chains, canceling investments, and relocating assets. As the world shifts towards a more uncertain geopolitical landscape, investors will need to reassess their strategies to navigate the changing dynamics.
