Macro: Six themes that will reshape investing in a new global order

Headlines about trade wars, political instability and inflation are more than passing concerns – they signal a fundamental transformation in how markets operate and interact.

As the tectonic plates of international finance and politics continue to shift, investors face both heightened risks and new opportunities. We believe the following six themes may offer a roadmap for understanding this evolving environment.

Geopolitical risk: The new normal

Geopolitical risk is now a permanent fixture in the investment landscape. The world has moved from a period of relative stability to one marked by persistent uncertainty.

Power is increasingly distributed among multiple global actors, while traditional institutions such as the International Monetary Fund and World Bank are losing their stabilizing influence. Economic interdependence, once a source of security, can now be weaponized through tariffs, technology restrictions, and control of critical minerals.

For investors, this means geopolitical shocks are likely to be more frequent and disruptive. Therefore, we believe building portfolios that can withstand these shocks – through regional diversification, resilient sectors and robust scenario analysis – has never been more important.¹

Economic balkanization: Winners & losers²

Globalization is giving way to economic balkanization, or fragmentation.2 Trade barriers are rising, with the average US tariff rate climbing since April. The relationship between the US and China now serves as a central axis for global economic alignment, influencing manufacturing decisions and capital flows.

Yet, fragmentation does not mean everyone loses. We believe certain countries, such as Mexico and those in Eastern Europe, are well positioned to benefit from shifting trade patterns and new manufacturing hubs.

Sectors that are tied to supply chain resilience, critical minerals, and future-proofed real estate may also offer fresh opportunities. Investors who look beyond the headlines and identify regions and themes poised for growth will be best equipped to thrive.

Diversification: Rethinking the old playbook

The classic 60% equity and 40% bonds portfolio – long considered the gold standard for diversification – is losing its effectiveness.

Supply shocks, rather than demand shocks, now dominate the economic landscape. Disruptions from geopolitics, climate change and pandemics tend to push economic growth down and inflation up simultaneously. As a result, equities and bonds – which once moved in opposite directions – now often rise and fall together.

We believe traditional methods of portfolio diversification offer less protection. That’s why investors are seeking alternative solutions in private markets, commodities, and assets less exposed to macroeconomic swings. Smarter, more flexible portfolio construction is essential for resilience in this new world order.

Central bank independence: Under pressure

Central bank independence, a cornerstone of modern finance, is facing unprecedented challenges. Political pressure on institutions such as the Federal Reserve is mounting, with new appointments and legal challenges threatening to reshape leadership and policy direction.

Globally, central banks are increasingly drawn into political debates and tasked with objectives beyond price stability, including climate and social goals. The risk is that monetary policy becomes less predictable, investors lose confidence in the ability of policymakers to control inflation and market volatility increases.

Investors must pay close attention to these policy shifts and prepare for a wider range of outcomes in interest rates and asset prices.

Bond market signals: Debt and deficits

Global debt levels have reached historic highs, with debt-to-GDP ratios exceeding 100% in many major economies. In the US, the deficit is running at levels rarely seen during periods of full employment.

Rising debt servicing costs are putting upward pressure on long-term bond yields, while political instability in countries such as France, the UK, and Japan, adds to the uncertainty. The possibility of a bond market crisis, though not our baseline scenario, is a risk that cannot be ignored.

This has far-reaching implications for portfolio construction and the risk-free rate – the theoretical return on an investment with zero default risk, or safest investment – used in financial models. We believe vigilance and flexibility are essential as markets adjust to these new realities.

US equity market concentration: Time to look beyond

Recent years have seen a handful of big US technology stocks dominate global equity returns, resulting in elevated market concentration and stretched valuations.

While this trend has delivered strong performance, it has also introduced vulnerabilities. In fact, our strategic asset allocation work suggests US equity returns may underperform over the next five to ten years. More compelling opportunities may be found in China, broader Asia, and parts of Europe, where valuations are more attractive and structural tailwinds are emerging.

The broadening of geographic sources of return is already underway, and a rotation away from US equities towards regions offering greater value could become a defining theme. Investors who diversify internationally and seek out undervalued markets may be better positioned for long-term capital growth.

Endnotes

¹ Diversification does not ensure a profit or protect against a loss in a declining market.
² The concept of economic balkanization refers to the fragmentation of the global economy into smaller, often hostile, independent states or regions.

Important information

Projections are offered as opinion and are not reflective of potential performance. Projections are not guaranteed and actual events or results may differ materially.

Foreign securities are more volatile, harder to price and less liquid than U.S. securities. They are subject to different accounting and regulatory standards, and political and economic risks. These risks are enhanced in emerging markets countries.

AA-071125-200730-1