How are institutional investors rethinking risk amid rising geopolitical tensions?
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Inform your discussions and decisions this week. Few investors pause their busy days to ponder the dividends of peace. Yet an increasing number now stop to price the cost of war, sanctions and shifting political alliances. This is because capital allocation no longer depends on calculations of expected returns versus market risk alone—the role of geopolitics also needs to be factored in.
One result is that as political differences between countries grow, their financial ties weaken. A working paper from the International Monetary Fund quantifies the trend: an increase in geopolitical distance, measured by differences in United Nations voting patterns similar to that between America and China, is associated with a 40% fall in equity investments and a 60% drop in bond investments between countries. How that pattern takes form in the decisions of institutional investors is the subject of our latest report, Friendvesting: the new architecture of investment in a fractured world, sponsored by Xtrackers and drawing on a survey of 300 institutional investors, including pension funds, sovereign-wealth vehicles, insurers and endowments across Europe, North America and Asia.
According to two-thirds of surveyed investors, the need to avoid or embrace particular countries and locations is the chief way geopolitics shapes institutional portfolios—but the impacts are not always straightforward. For real assets, such as ports or property, location is fate. For other assets, geography is more about dependence. With equities, the key question is not whether a firm is listed in New York or Beijing but whether its suppliers, customers or operations reside in jurisdictions that could lead to complications.
Consider Apple, whose iPhones—nine-in-ten assembled in China—have been caught in the Sino-American trade war. Within weeks, billions were wiped, regained, then wiped again from the tech giant’s valuation, making the only predictable aspect of this geopolitically-fuelled buffeting its unpredictability. Investors must now also consider the geopolitical side effects too: Apple faces partial Chinese procurement bans and patriotic consumers shifting to competitors such as Huawei. But the cost of geopolitics runs both ways—the level of foreign ownership of Chinese equities dropped from 6.4% in 2021 to 4% by the end of 2024. Our survey confirms that about six in ten investors worldwide mitigate geopolitical risk by aligning capital closer to home or with countries perceived as friendlier.
Beyond geography, about four in ten investors see geopolitical risk primarily through the lens of sectors. To them, what firms do determines their vulnerability. Technology, which formerly accounted for large shares of cross-border capital flows, is now a focus for investors’ geopolitical concerns, as countries pursue digital sovereignty and restrict dual-use (civilian and military) technologies. Consider Nvidia, maker of advanced AI chips: despite strong global demand, about 30% of its $34bn export revenue in 2024 came from China, a market now constrained by American export restrictions. The challenge for investors is to price growth subject to sovereign veto.
More broadly, quantifying geopolitical risk is still difficult. Our survey finds that nearly half of institutional investors view forecasting uncertainty as their biggest challenge in navigating international strife. But they are also finding better ways to respond. About a third have developed formal risk policies, another third have geopolitics-focused working groups or cross-functional committees, while a tenth hire geopolitical consultancies, often staffed by former diplomats.
Also in this issue, read our adjacent report shortlisted at the 2025 World Media Awards, Growth at a crossroads: measuring the cost of financial fragmentation, which attempts to quantify the hidden toll exacted by a splintering global financial system.
Explore how institutional investors are reassessing risk and changing portfolio design in a world of proliferating conflict. Based on a survey of 300 institutional investors—including pension funds, insurers, sovereign wealth funds, endowments, family offices and government agencies—from North America, Europe and Asia, our latest report describes how capital allocation is changing.
Explore four of the UK’s strongly performing regions: England’s thriving life-sciences sector, semiconductor cluster, clean-energy industry and Scotland’s financial services industry. These areas offer ready-made networks of suppliers and talent, paths from research to commercialisation, and investors ready to support expansion.
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