How Institutional Investors Are Reacting to De-globalization
A Schroders survey of 770 pension funds, insurers, sovereign wealth funds, and other investors reveals how their home countries are re-shaping portfolios.
The location of a pension fund, insurance company, or sovereign wealth fund has always influenced these institutional investors’ portfolios. But the acceleration of de-globalization means an investor’s home country is a far bigger factor, and it’s impacting decisions in different ways.
Trade and technology continue to cross borders and, generally speaking, the world is still shrinking. However, geopolitics, such as the wars in Ukraine and Israel and tensions between China and the U.S., has turned de-globalization into a megatrend creating winners and losers in business. The biggest investors acknowledge that and are making changes accordingly.
Out of 770 institutional investors around the globe that are collectively responsible for $34.7 trillion in assets, 52 percent said in June that as de-globalization accelerates they will try to invest in companies with more localized supply chains, according to an annual study by Schroders. Half of the institutions (49 percent) also said that they were seeking more opportunities in private markets and alternative investments to get exposure to “productivity-enabling technologies” like artificial intelligence. Those results were relatively similar across regions of the world.
But de-globalization is having a broad range of impacts on institutional investors’ outlooks and decisions. Forty percent of institutions in Latin America said that de-globalization was a threat because it would move the global economy into a “stagflationary direction.” Only 29 percent of institutions in North America felt the same way.
Institutions didn’t wholly agree on what asset classes will thrive and be the best investment opportunities over the next two to three years as de-globalization unfolds. Thirty-two percent said domestic stocks, 24 percent infrastructure and renewables, 23 percent emerging market stocks, 23 percent private equity, and 22 percent said commodities.
“Around the world, we are seeing a huge surge in the energy transition as nations move from fossil fuel reliance to greener energy sources. Countries are likely to rapidly accelerate the decarbonization of power generation as emissions need to fall by more than 40 percent in the next seven years as a vital step toward meeting net zero requirements by 2050,” Schroders said in its report. “The shift to net zero emissions represents a new key structural trend for the global economy. It will require a radical change in the energy system and in other key sectors of the economy.”
Although half of all institutions said they wanted to invest in companies with local supply chains, they didn’t mean all companies. Half of Latin American institutions said they were seeking exposure to small-cap stocks with a domestic production base. Meanwhile, only 32 percent of European, Middle Eastern, and African institutions, 30 percent of Asia-Pacific and 29 percent of North American institutions had the same enthusiasm, even though many investors suggest now is a great time to invest in small caps.
“In response to the geopolitical disruption and uncertainty we are facing, we are seeing a new world order develop. Companies are diversifying their production and relocating it nearer to home in a process known as ‘reshoring’. This year’s respondents agreed with this sentiment,” Schroders said about institutional investors.