by Laura Matthews and Tom Westbrook

NEW YORK/SINGAPORE (Reuters) – Geopolitics is back on investors’ radar as fears of a fragmented Europe, an isolationist America and a slowdown in global trade sparked a turbulent few weeks in markets.

This year, geopolitics has thus topped the list of concerns for sovereign wealth fund managers, as money has fled risky geographies, such as Taiwan, to seek refuge in safe assets, such as gold, which reached a record high last week.

The general impression is that an era of peace and unhindered trade is ending, and that the future will be less profitable.

Half the world has, or will, go to the polls this year, and the election results confirm this shift: Taiwan elected a president hated in Beijing, the European elections in France confirmed the rise of the far right, while Britain elected the largest left-wing majority in a generation.

The American situation is no less turbulent, with Republican candidate Donald Trump having escaped an assassination attempt while incumbent President Joe Biden dropped out of the race less than four months before the election.

“(Geopolitics) is one of the most important issues we have had to integrate into our investment process,” said Erik Knutzen, head of multi-asset investments at Neuberger Berman.

“On a large scale, this translates into an analysis of the overall risk of our portfolios. An environment marked by significant geopolitical risks would make us reduce the risk of our portfolios,” adds the manager.

In fact, the markets immediately reacted to two risks that a Donald Trump victory would aggravate: that of persistently high inflation and that of restrictions on semiconductor sales.

Gold, seen as a hedge against inflation and supported by massive central bank purchases, rose above $2,450 an ounce in the sessions following the attempted assassination of Donald Trump, an event that boosted his chances of victory.

“All of Trump’s economic policies are likely to be inflationary, whether it’s tax cuts, immigration cuts or the repatriation of the industrial base, which puts pressure on the dollar (…) which depreciates against gold,” summarizes Prashant Kothaari, managing director at Alpha Alternatives.

At the same time, TSMC’s market capitalization fell by more than $100 billion in the days following equivocal comments from the Republican candidate, who seemed ambivalent about providing military protection to the island and its semiconductor sector.

Goldman Sachs’ Taiwan Strait Risk Indicator remains below its record high but rebounded last week, while Taiwan’s currency hit an eight-year low on Monday as capital fled the archipelago amid Sino-U.S. tensions.

“The return of geopolitical risk has blunted the appetite for the artificial intelligence hardware sector,” notes Norman Villamin, chief strategist at Union Bancaire Privée.

RISK

Geopolitical tensions are also changing long-term global economic and political projections.

“Tensions are likely to remain high and lead to policy decisions whose impacts will last for years,” said David Bianco, chief investment officer for the Americas at DWS.

The energy and defense sectors, and raw materials such as copper and uranium, would benefit.

Conversely, the legislative elections in France have pushed investors to reduce their exposure to France.

“We are underweight France and Italian sovereigns as there is likely to be some political uncertainty as a lower budget deficit is negotiated,” said David Zahn, head of European fixed income at Franklin Templeton.

The markets are not panicking: the Vix, the indicator of nervousness in the American stock markets, remains weak, while the S&P 500 has only lost 3% compared to its record, a consolidation considered healthy by operators.

“Geopolitics is never the primary concern of the markets, which focus on rates and corporate earnings growth, especially for equity markets,” explains Matt Sherwood, head of multi-asset strategy at Perpetual.

“But geopolitics is one of those risks that has significant impacts if they materialize. What is needed then is a low-cost diversification strategy that protects on the downside and offers upside potential,” the manager added.

Six-month options protecting against a sharp decline in stocks or the dollar are currently inexpensive, indicating that demand is weak.

However, there has been some buying recently as investors have become less optimistic.

Pankaj Agarwal, a manager at family office AT Capital, is reducing his direct exposure to stocks and is taking a position on index call spreads, a strategy that can limit gains but prevent losses. Others are preparing for a less profitable future.

“For thirty years, investors have benefited from the most significant period of globalization and geopolitical stability ever known,” said Michael Rosen, chief investment officer at Angeles Investments.

“A new era has begun, and it is riskier.”

(With contributions from Dhara Ranasinghe in London; by Corentin Chappron, edited by Kate Entringer)

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