An institutional investor’s guide to the geopolitical landscape

Executive summary:

The increase in global instability can be traced to the shift from a unipolar world—dominated by the U.S.—to a multipolar world, largely driven by China’s rise.
The outcome of the U.S. elections is unlikely to have significant impacts on equity markets, which are usually driven more by the health of the economy. Bond markets, however, could be impacted by changes in fiscal policy.
At Russell Investments, we’re maintaining a balanced exposure in equities, with an emphasis on stock selection. We see government bonds as fairly valued. Amid the geopolitical uncertainty, we believe it’s important to stick to a strategic asset allocation.

At the Russell Investments 2024 Institutional Summit, Chief Investment Strategist, Andrew Pease, and Managing Director of Market Leadership, Lisa Schneider discussed the current geopolitical landscape, upcoming trends, and the implications for portfolio management. Below is a recap of their conversation.

Key drivers of the rise in global instability

Pease and Schneider began by acknowledging the rise in global instability, which includes conflicts like the Russia-Ukraine war, tensions in the Middle East and between China and Taiwan. Pease emphasized that this era marks a shift from a unipolar world—dominated by the United States—to a multipolar one, largely due to China’s rise.

He also noted that 2024 has been a significant year for democracy, with record voter turnout in elections across India, France, and Iran. The Indian election in particular stands out as an optimistic story, Pease said. Prime Minister Narendra Modi, seeking a third term, lost his majority and accepted the outcome, demonstrating the resilience of Indian democracy. France’s election also showed a shift back to centrist values after initial support for far-right candidates. In Iran, the unexpected election of a moderate leader offers potential for renewed diplomatic ties, contingent on the outcome of the U.S. elections.

Potential impacts of the U.S. elections

Pease turned to the potential impact of the U.S. elections, focusing on the possible different outcomes. A continuation of the Democratic administration would likely maintain the status quo in international relations, including current policies involving trade and the war in Ukraine. Although markets have expressed more uncertainties if former President Donald Trump returns to the White House, Pease said a second Trump term might not necessarily lead to increased instability.

The discussion moved to the financial implications of these political shifts, particularly on markets. Historical trends show that the party in power in the U.S. often has little direct impact on the stock market, with external factors like economic cycles playing a larger role. However, the bond market, especially in the context of rising deficits, is increasingly significant. Pease highlighted the example of the UK's bond market crisis in 2022 under former Prime Minister Liz Truss, illustrating how quickly markets can react to policy missteps. This incident serves as a reminder of the bond market's power and its potential influence on future U.S. fiscal policy, he said.

Looking ahead, the next U.S. president will have a crucial decision in appointing the Federal Reserve (Fed) chair, Pease said. This choice could significantly affect monetary policy and inflation management. He noted that while the Fed’s aim is for a 2% inflation target, political influence could potentially alter this goal, leading to scenarios where higher inflation might be tolerated. He stressed that maintaining central bank independence is vital for economic stability, but that political appointments could pose risks.

The conversation then shifted to long-term trends, particularly the implications of U.S. debt levels. For the first time, U.S. spending on debt servicing exceeds military expenditure, raising questions about America’s ability to sustain its global military presence, Pease said. This shift could create a vacuum in global leadership, potentially filled by other powers like China or regional alliances, he noted.

The outlook for China and India

Next, Pease and Schneider explored the dynamics between the U.S, China, and India. India’s growing importance is highlighted by its demographic advantages, with a working-age population now surpassing China’s. However, its economic structure still faces challenges, such as a lack of industrial development. Politically, India is likely to maintain an independent stance but may lean more toward alignment with the West, as seen through its participation in the Quad—a strategic partnership with the U.S., Japan, and Australia aimed at counterbalancing China’s influence.

Regarding China, Andrew noted that its economy faces structural challenges, including an over-reliance on production rather than consumption. He suggested that while China's short-term prospects may appear bleak due to economic mismanagement, its long-term potential remains attractive, especially given the low valuations of Chinese equities.

The intersection of geopolitics and investing: How we’re positioning our portfolios

From an investment perspective, Pease emphasized the need for a disciplined approach to incorporating geopolitical risks into portfolio strategies. He explained that Russell Investments employs a framework considering long-term capital market assumptions, medium-term cyclical risks, and short-term tactical opportunities. He pointed out that geopolitical events are most relevant for assessing long-term growth and inflation risks, which shape strategic asset allocation decisions.

Pease said that at Russell Investments, the strategist team today prefers a balanced exposure on equities, with stock selection being the key driver. The team sees government bonds as fairly valued and notes that they could offer positive asymmetry if economic growth deteriorates further. Overall, Pease emphasized the importance of sticking to a strategic asset allocation given the lack of clarity over the outlook.

The bottom line

Pease and Schneider finished by emphasizing that amid a backdrop of geopolitical uncertainty, it’s important to maintain a structured process for evaluating risks and opportunities. Ultimately, they stressed that understanding the connection between geopolitics, markets, and economies is essential for making informed investment decisions in today’s increasingly volatile world.