The Geopolitical Discount: Valuing Risk in an Age of Policy Protectionism
In the 1990s, "geopolitics" was an elective for investment managers; in 2025, it is the core curriculum. We have entered an age of "Policy Protectionism," where tariffs, export controls, and industrial subsidies are the primary drivers of corporate profitability. Investment managers are now forced to apply a "Geopolitical Discount" (or premium) to nearly every asset in their purview. When the US "CHIPS Act" or the EU "Green Deal Industrial Plan" can shift billions in market cap with a single legislative amendment, the "DCF" (Discounted Cash Flow) model must be augmented with "Policy Scenario Analysis."
This environment creates a "Diversification Mirage." Investment managers are finding that diversifying across different companies in the same "geopolitical bloc" provides no protection against systemic shocks. True diversification now requires "idiosyncratic exposure"—owning assets that are fundamentally disconnected from the "mega-forces" of US-China competition or Russian energy dynamics. This has led to an overweighting of "safe-havens" like gold and highly-localized private debt. The investment manager today is a "macro-prudential guardian," tasked with ensuring that a client’s wealth is not collateral damage in a global trade war. They are the ones who understand that in 2025, the most dangerous thing you can own is a "consensus trade" that assumes a return to the globalization of the past.