Institutional investors must take the rising tide of populism into account when measuring their global risk, according to a new white paper from PGIM, the money management unit of Prudential Financial.
The paper, "The End of Sovereignty?" says that nationalism and populism among the middle-class sectors in developed markets has risen, and while that has caused some to say the phenomenon of globalization has ended, still 70 of the top 100 global economies are multinational in nature. Still, some sovereign nations are attempting to scale back their exposures to globalization. The paper says this, and how it will affect global investing, may "well be one of the defining struggles of our time."
To limit exposure to the risk of this struggle, the paper says investors should limit reliance on top-down country-level factors; apply a global framework for all investment decisions because events across countries can affect asset prices; make sure developed market risk is managed in addition to the more traditional move of managing emerging markets risk; position the portfolio for greater volatility and geopolitical uncertainty; and take on public stances on global challenges.
The white paper points out the aftereffects of the Brexit vote in 2016 that left investors "scrambling to understand their true underlying exposure to the U.K.," as a reason for recognizing developed market risk. The paper also points out investors should consider a single global benchmark and "broaden the analytical lens" to understand how companies can benefit from globalization or withstand the backlashes, regulatory and otherwise, of a single sovereign nation.