Learnings from our Investment Round Table: Geopolitics - Prepare or Predict?

Author: Enes Morina

Geopolitics has become an increasingly prominent feature of global markets this year. From the ongoing conflicts in Ukraine and the Middle East, investors are navigating a more fractured world order with rising defence spending, changing supply chains and more protectionist trade. Yet despite these trends, financial markets have proved remarkably resilient, raising questions about how much geopolitical risk really matters for investors. 

Against this backdrop, the CFA UK Investment Strategy Roundtable Series brought together investment professionals to discuss geopolitical and political uncertainty within markets. Speaking under Chatham House rules, panelists debated whether geopolitics really matters for markets, which investment themes are emerging from global fragmentation, how to assess the upcoming US midterm elections and UK budget, and which geopolitical risks investors may be underestimating. 

Does geopolitics really matter for markets? 

The roundtable explored differing views on the extent to which geopolitics mattered for markets. One argument was that valuations, discount rates and cash flows ultimately matter more. Despite recurrent geopolitical shocks, market returns have historically remained resilient: US equity returns have delivered 7.5-8% per annum in real terms over the last 150 years. 

While geopolitical flashpoints can induce periods of market stress in the short term, the long-term effects have tended to dissipate. The Vix index, which gauges investor expectations of short-term volatility in US stocks, has historically been a useful indicator of future returns. Higher levels of market stress driven by geopolitical events have tended to be followed by stronger equity returns over the subsequent 100 days. 

International stability has also not been essential for strong market returns in the US. The relatively peaceful period between the end of the Cold War and 9/11 was highlighted by the roundtable as one of the ten-year periods with the weakest returns on record. 

That backdrop was not necessarily the same for emerging market investors, for whom geopolitical developments may have a greater impact. The roundtable pointed to the fracturing of supply chains between the US and China on national security grounds, particularly across sectors such as defence, critical materials and technology. 

Technology provides a clear example. AI-related supply chains are increasingly divided between China and the rest of the world. US companies such as Microsoft and Nvidia depend heavily on supply chains linked to Taiwan and South Korea, while China is developing its own semiconductor ecosystem, the roundtable said. 

Bottom-up investors have historically sought to account for these risks by incorporating them into the equity risk premium (the additional return investors demand for holding equities rather than risk-free assets), the roundtable said. However, conventional discounted cash flow assumptions may not adequately capture the effects of fractured supply chains on margins and pricing power. 

Geopolitical uncertainty, particularly around government budgets and policy, has bolstered the case for a bottom-up investment approach rather than a macro-based one, the roundtable said. They pointed to two examples: the change in leadership for the UK Labour government in July after only two years in power and the review of the controversial Chagos Islands deal. Such uncertainty can favour assessing specific products, services and opportunities on case and day-by-day,” they said. 

What investment themes are being driven by geopolitics? 

Defence spending has surged in many countries amid Russia’s invasion of Ukraine and the ongoing conflict in the Middle East. According to the Stockholm International Peace Research Institute, the world’s military expenditure as a share of GDP rose from 2.4% in 2024 to 2.5% in 2025 – the highest level since 2009. Yet government defence spending initiatives have not necessarily translated into large-cap equity performance. European defence ETFs were cited as delivering roughly flat returns over the last 12 to 15 months compared with a rise of around 20% in MSCI Europe. 

One investment theme being driven by geopolitical fragmentation is the prospect of higher inflation and interest rates for longer, which could weigh on longer-duration bonds, the roundtable said. In the two decades in the run up to the Covid-19 pandemic, Western economies were able to sustain services and wage inflation of around 3.5-4% alongside near-zero goods inflation, supported by outsourcing to China. 

That balance shifted since the pandemic. US tariffs and efforts to build more resilient supply chains have contributed to higher goods inflation. Returning to an environment of low and stable inflation would require higher rates to bring down above-target services and wage inflation, with significant implications for bond markets. 

The global bond market also faces pressure from AI-related debt issuance. The roundtable touched on the US Treasury's Scott Bessent’s encouragement of corporates to shift issuance towards medium-term maturities, potentially easing pressure on the long end of the government bond yield curve. While AI-related debt issuance mostly concerned the US, long-duration bonds have faced pressure globally, the panel noted. 

Could the US midterms impact markets? 

The US midterm elections were generally viewed as unlikely to have a major impact on markets. President Donald Trump’s reliance on executive orders could allow much of policy agenda to continue regardless of the outcome, the roundtable said. His ability to initiate military operations, such as in Venezuela and Iran, may likewise remain unconstrained even if the Democratic Party takes control over one of the chambers of Congress. 

Much of the potential impact of the midterms may already be priced into markets. The administration’s protectionist trade stance is also unlikely to change substantially, given its use of Section 301 investigations and executive orders. A Democratic sweep, however, could weigh on equities if it leads to tighter regulation and fewer tax cuts. 

A potential consequence of the midterms could be the return of recurring debt-ceiling disputes, the roundtable said. Even a remote risk of a missed US Treasury coupon payment could unsettle markets and become a recurring theme over the following years if political gridlock ensues. 

What impact will the UK’s new Budget have? 

Elevated inflation and rising borrowing costs have eroded much of the UK’s fiscal headroom – the gap between government borrowing and tax revenues. The Institute for Fiscal Studies has warned that the government will need £36 billion in tax hikes or spending cuts to offset the inflation hit to public services. Higher gilt yields could therefore increase the likelihood of tax rises to address the emerging fiscal gap, the roundtable said. 

The roundtable was hesitant to pin down sectors in the UK worth investing in. Defence remains an area of interest, although valuations have become expensive and opportunities may be more attractive further down the market-capitalisation spectrum. Uncertainty over gilt yields and sterling makes it difficult to identify sectors likely to perform well. 

Valuations were a particular concern in defence, where finding attractive entry points has become difficult. For some defence companies, the near-term Budget outlook may have relatively little bearing on their investment prospects. 

What are we underestimating in geopolitics? 

Among the potentially underestimated geopolitical risks are national security threats capable of disrupting financial markets, the roundtable said. Vulnerabilities include undersea cables, cyberattacks on exchanges and the wider dependence of financial infrastructure on digital systems. The combination of AI-related threats and national security risks could amplify the consequences of market outages. 

The high costs associated with the data-centre buildout could also have political consequences, potentially becoming more prominent during the US midterms and carrying wider geopolitical implications too. 

The roundtable noted that another underappreciated consideration was the need to understand the objectives and motivations of both international partners and adversaries. Assessing where those interests align of diverge is critical for interpreting geopolitical developments and its impact on markets. 

Lastly, the cost of capital and the scale of debt across western economies remain significant risks, the roundtable said. Heavy debt burdens are influencing rates markets, while recent developments – such as the US Treasury intervening to prop up the Japanese yen – underline the extraordinary nature of our current environment.