Geopolitics: Investing in a fractured world

Jeremy Butterworth (Wellington Management) and Kerry Craig (J.P. Morgan Asset Management) discuss the rise of U.S. exceptionalism and the impact of geopolitics on portfolio construction.

In today’s environment, geopolitics is very much at the forefront of thoughts and ideas around asset allocation. That’s because geopolitic events are key drivers of macro outcomes and market dispersion, as well as investment opportunities.

Although geopolitical events are virtually impossible to time or know how long they will last, when they impact energy markets (like oil and natural gas), history has shown these types of events are more impactful on global investment markets. So, when it comes to allocating capital, Jeremy Butterworth, CFA — Investment Strategist at Wellington Management — believes it’s essential to properly understand the evolving dynamics of geopolitics when making capital market assumptions in relation to asset allocation.

By Jayson Forrest

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Speaking on the topic ‘Geopolitics and the direction of U.S. exceptionalism’ at the 2026 IMAP Portfolio Management Conference, Jeremy believes that thinking about geopolitics through the lens of ‘U.S. exceptionalism’ — the belief that the United States is distinctive and ideal compared to other nations — can provide investors with a clearer picture in terms of implications for the broader market and investing in it.

“If you look at geopolitics and its shaping of U.S. exceptionalism, the pre-eminence of U.S. national security has been the hidden gem of U.S. market and macro exceptionalism,” says Jeremy. “For decades, there has been unmatched U.S. military and diplomatic institutional and economic dominance. That has enabled and supported global stability, creating mutual economic success post WW2.

“The Unites States has shaped the world’s rules-based order — instrumental in creating NATO, the International Monetary Fund, the United Nations, and the World Trade Organization. These types of initiatives has allowed the U.S. to help create a stable global network.”

Jeremy says through global alliances and military capabilities, the U.S. has helped ensure free access, security and stability in shared global spaces. This has made globalisation not only possible but has ensured mutual economic success for all participants. The U.S. has also been deliberate in building the infrastructure for deep and liquid financial markets, allowing for capital formation, and enabling the U.S. dollar to become the world’s reserve currency.

“None of this has been accidental,” says Jeremy. “The U.S. has been very deliberate in cultivating these alliances, developing these organisations, and laying the infrastructure for capital formation and movement. This has all underpinned U.S. exceptionalism and the rise of modern globalisation.”

However, roll forward to today, and Jeremy says there has been a noticeable deterioration in much of the world’s rules-based order, such as the rule-of-law and political/global stability, which are steadily fracturing the world order.

“We have to recognise the tide has been shifting for a number of years in the global order. Since about 2015, this deterioration has really picked up speed. Our research suggests that government effectiveness, plus diplomatic and institutional capacity have been faltering.”

Jeremy believes that in many ways, this deterioration has been accelerated by the Trump administration and its approach to foreign policy and global co-operation. This is supported by Wellington’s research that shows that today, policy around the world is increasingly being driven by national security and not economic efficiency.

He adds that for decades, the world has benefitted from the powerful structural advantage of the U.S., which has been leveraged by the rest of the world for mutual economic success. However, Jeremy believes we are now shifting to a period that will be more unpredictable, multi-polar and fragmented.

“Global governments are prioritising economic resilience and sovereignty over globalisation, which means they are willing to accept higher economic costs as a result of that. And countries around the world are rapidly hedging against an increasingly unpredictable and less reliable United States,” he says.

Kerry Craig — Managing Director and Global Market Strategist at J.P. Morgan Asset Management — shares Jeremy’s views on U.S. exceptionalism, and agrees that geopolitical events are becoming more frequent. However, he adds these events tend to be short-lived, with drawdowns generally not being too big and recovering quickly.

“That’s why we advocate for not making knee-jerk reactions when these geopolitical events occur,” he says.

As an example, Kerry refers to the current global energy security issues, with the shipping of oil and natural gas through the Strait of Hormuz. While Asian countries are more reliant on this flow of energy, he acknowledges that overall, the world is becoming less reliant on fossil fuels, as many countries transition to renewable energy.

“So, this energy shock is unlikely to be as large as it was back in the 1970s. But this is where we start to consider the big themes around geopolitics that can be captured in a portfolio, which do influence how we think about how asset classes actually work together or not. And because this is a focus on energy security, it also becomes a focus on defence, where we’ve seen an increase in defence spending by many governments,” says Kerry.

He explains that as a result of geopolitical events in Ukraine and the Middle East, there is increased focus by many countries on energy security, which flows through to defence spending.

“A consequence of these geopolitical events is the knock-on effect they have when thinking about  asset allocation,” says Kerry. “For example: what will bond markets do; how should we think about growth in these affected regions; how will equities behave; and importantly, how should we think about diversification across global equity markets and not simply think about U.S. exceptionalism.”  

U.S. tariffs are also an important geopolitical issue that needs to be considered. Kerry adds that U.S. tariffs are at their highest levels since the 1930s, as the U.S. seeks to address ‘unfair’ trade imbalances. He believes these tariffs are likely to sit at around 10-12 per cent, which will lead to fragmentation of the global economy.

“We’re now seeing a rise in nationalism and popularism, not just in the U.S., but also around the world, where there has been pushback from what has been a very globalised world. Countries are now focusing more on themselves, as trade alliances begin to form amongst countries with similar political leanings.”

However, while these factors will impact the outlook for global economic growth, and possibly push up inflation forecasts, Kerry says there are no signs of a slowdown in global trade. “Global trade is still increasing overall, as supply chains re-shape and trade alliances are established.”

Against this backdrop of a changing economic and political regime, and with increasing fragmentation of the global environment, should investors be de-risking their portfolios?

“It’s an interesting question,” says Jeremy. “It’s our fundamental view that the fragmentation we’re witnessing means dispersion, not collapse. So, you can expect to see greater dispersion, whether it’s on a geographical basis or between countries. You’re going to see greater dispersion between and within industries. That dispersion creates a lot of opportunities.”

However, Jeremy cautions that as advisers construct portfolios, they need to be thoughtful about how they are building asset allocations and the ‘dimensionality’ of the returns in portfolios. Dimensionality refers to the number of identifiable sources of risk and return (dimensions) used to diversify or tilt a portfolio, often focusing on drivers like size, value, and profitability. It represents a shift from simple, low-dimensional models (like just holding the market) to multi-dimensional approaches that systematically target higher expected returns.

When considering equities, Jeremy points to the U.S., which has been the one market that has consistently delivered returns to investors. Since 2009, the U.S. equity market has been the dominant place to be invested, where earnings growth has been the driver for the U.S. market.

“Even if you take out tech (like Nvidia and Microsoft) and look at the broad market, relative to the rest of the world, the U.S. market is still the place to be invested, even when having to pay a premium to be there,” says Jeremy. “We believe there is scope for this to continue, but maybe in a different level of dimensionality.”

Wellington favours private markets, which it believes are more appealing in relation to equity markets in the U.S., particularly late stage companies that are moving from private to public markets. “When we’re thinking about constructive allocations and where innovation can still be dominant, even in the face of potentially greater geopolitical instability, private markets is one area we think is still interesting.”

When it comes to building portfolios, Jeremy believes it’s important to look outside the mega-cap tech stocks. He says forecasted earnings over the next year are far more appealing in U.S. and global small caps.

“So, when we’re thinking about building portfolios, we’re looking at a wider subset of equities. It’s about how we can introduce differentiated returns. And when you look at small caps, many of these companies have a high level of insulation. They are domestically focused and generally are not exposed to the same level of external trade/government policy that impacts large caps.”

In addition, Jeremy points to emerging markets in Europe (like the Czech Republic, Greece, Hungary, Poland, and Turkey), which are also becoming increasingly attractive, when looking at their forward earnings. “So, as you build portfolios and think about dispersion, regional exposures could be more interesting to invest in.” 

Jeremy Butterworth, CFA is Investment Strategist at Wellington Management; and

Kerry Craig is Managing Director and Global Market Strategist at J.P. Morgan Asset Management.

They spoke on the topics ‘Geopolitics and the direction of U.S. exceptionalism’ and ‘Geopolitics: Investing in a divided world’ at the 2026 IMAP Portfolio Management Conference in Sydney and Melbourne.