Global Diversification in a Deglobalizing World

## Global Diversification in a Deglobalizing World For decades, global diversification has been a cornerstone of institutional investment strategy. The logic was simple and compelling: by investing across different countries and regions, investors could reduce their risk without sacrificing their returns. However, the tide of globalization, which has been a powerful tailwind for this strategy, is now showing signs of turning. A combination of geopolitical tensions, trade wars, and a renewed focus on national interests is leading to a more fragmented and deglobalized world. This has profound implications for pension fund asset allocation and raises the question of whether global diversification is still a viable strategy. ### The End of the Unipolar Moment: A More Multipolar World The post-Cold War era was characterized by the dominance of the United States and a broad consensus in favor of free trade and open markets. This "unipolar moment," as it has been called, created a favorable environment for global diversification. However, the rise of China as a major economic and geopolitical power, the resurgence of Russia, and the growing assertiveness of other regional powers are leading to a more multipolar and competitive world. This is creating new sources of risk and uncertainty for global investors. ### The Return of Geopolitics: Trade Wars and Supply Chain Disruptions The trade war between the United States and China, which began in 2018, was a wake-up call for global investors. It demonstrated that geopolitical considerations could no longer be ignored in investment decision-making. The COVID-19 pandemic has further highlighted the risks of over-reliance on global supply chains, leading many companies to rethink their sourcing and manufacturing strategies. These developments are leading to a more fragmented and regionalized global economy, which could reduce the benefits of global diversification. ### Rethinking Country and Regional Allocations: A More Nuanced Approach In this new environment, a simple, passive approach to global diversification is no longer sufficient. Pension funds need to adopt a more nuanced and active approach to country and regional allocation. This involves a deeper understanding of the political, economic, and social dynamics of each country and region, as well as a more sophisticated approach to risk management. For example, investors may need to consider hedging their currency exposure more actively or to use derivatives to protect their portfolios against geopolitical risks. ### Strategies for Navigating a More Fragmented World: The Rise of Thematic Investing One way to navigate a more fragmented world is to focus on long-term secular themes that cut across national borders. Thematic investing, as it is known, involves identifying powerful, long-term trends, such as demographic change, technological innovation, and climate change, and investing in companies that are well-positioned to benefit from these trends. This approach can help to reduce the reliance on country-specific factors and to build a more resilient and forward-looking portfolio. ### Conclusion: Global Diversification is Not Dead, But It is Changing Global diversification is not dead, but it is changing. The simple, passive approach of the past is no longer sufficient in a more complex and fragmented world. Pension funds need to adopt a more active, nuanced, and sophisticated approach to global asset allocation. This involves a deeper understanding of geopolitics, a more active approach to risk management, and a greater focus on long-term secular themes. For those who can adapt to this new reality, the benefits of global diversification are still there for the taking.