What happened
Geopolitical fragmentation has been impacting where investment managers can do business, what they can invest in and who they can work with. The risk of sanctions is significantly affecting business models. Asset owners that are government-backed or linked are facing especially heightened pressure.
New laws may further limit investment opportunities in certain markets or sectors, such as the US Treasury releasing its notice of proposed rulemaking that would impose controls4 on certain outbound investments in China.
Additionally, there is a growing concern among investment managers around cybersecurity and the risk that geopolitical tensions could limit international cooperation to tackle any cyber warfare5 that may emerge.
What’s next
Geopolitical conflicts will continue and new regulations, including around data sovereignty, enhanced security and resilience, and sustainability policy, will impact investment managers’ operations. This will likely lead to new cross-border partnerships to ensure a robust infrastructure and optimization of technologies such as artificial intelligence (AI).
The US and some other “Western” governments will likely continue to push firms to divest from certain strategic sectors in geopolitical rivals. While this may adversely impact business for some firms, it could present some opportunities for investment managers from geopolitical swing states such as Singapore, UAE and Saudi Arabia.
Business impact
Investment managers should proactively create operational and portfolio resilience6, with robust governance frameworks in place to build trust among stakeholders. Firms should prepare for potential power shifts in a multipolar world and related regulatory changes that may lead to divergent policies around sustainability and AI.
Investment firms should continually test, exercise, and train their staff and systems to reveal scenarios and weaknesses – internally and externally. Collaboration between investment managers, service providers and policymakers is important to navigate a complex cross-border environment and best utilize new technologies and talent.
Geopolitics should continue being prioritized by investment managers as a critical area of focus when making any new capital allocation decisions – be it around their investments, operating models or growth strategy.
For more information, contact Mark Wightman and Meghna Mukerjee