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
Jeremy Butterworth, CFA
Investment Strategist
Wellington Management

Kerry Craig
Managing Director & Global Market Strategist
.P. Morgan Asset Management

Continued.....
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.”
Even if you take out tech 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. We believe there is scope for this to continue, but maybe in a different level of dimensionality
That was then, this is now
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.
In 2020, 70 per cent of global foreign exchange reserves were held in U.S. dollars. Today, that number has dropped to 58 per cent. So, there is a slow movement away from the U.S. dollar to perceived ‘safer currencies’, but it’s a slow, longer term trend
Avoid knee-jerk reactions
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.”
Even if you take out tech 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. We believe there is scope for this to continue, but maybe in a different level of dimensionality
Global supply chain diversification
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.”
A consequence of these geopolitical events is the knock-on effect they have when thinking about asset allocation. 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
Hedge the risks you can see, and diversify for those you can’t. You can overcome the risk of geopolitics by diversifying and building a robust portfolio with an appropriate asset mix. This allows you to diversify for the future, for those risks you can’t see today
The role of the U.S. dollar
According to Jeremy, against the backdrop of geopolitics and U.S. exceptionalism, a key attribute of fixed income is the role of the U.S. dollar. However, he acknowledges that one of the issues Wellington has been grappling with is the likely future demand for the U.S. dollar, and whether there will be a transition or a moderation in demand for it.
“Since 2020, we’ve seen the Euro and other currencies start to pick up, with many governments around the world increasing their ownership of physical gold. That also increases the willingness of central banks to hedge against some of these geopolitical risks and exposure to U.S. dollar weakness,” says Jeremy.
Kerry agrees, pointing to the number of central banks buying gold as a means of diversifying their holdings. “The demand for gold is likely to outstrip supply, as investors seek to hedge out some of the risk from their portfolios. Gold works well in times of stress, so it’s a natural way for investors to think about greater diversification in a portfolio.”
However, he doesn’t believe in the argument that the world is moving away from the U.S. dollar as the reserve currency. Rather, he predicts the ‘debasement’ (the long-term reduction of its structural value) of the U.S. dollar, which will be a slow moving trend.
“In 2020, 70 per cent of global foreign exchange reserves were held in U.S. dollars. Today, that number has dropped to 58 per cent. So, there is a slow movement away from the U.S. dollar to perceived ‘safer currencies’ (like the Australian and Canadian dollar), but it’s a slow, longer term trend,” says Kerry.
“However, we still believe there is no clear replacement for the U.S. dollar — it’s not the Euro or Renminbi. The U.S. dollar still controls the world’s financial currency because it dominates so many things — like emerging market debt, foreign currency debt, SWIFT payments, and trade invoicing — that underpin global commerce.”
Jeremy agrees that while there is a modest shift away from the U.S. dollar, there is no meaningful alternative to the U.S. dollar as the world’s reserve currency, despite the Chinese setting up their own swap lines with many governments around the world. These swap lines are reciprocal agreements between central banks to exchange currencies to provide foreign currency liquidity to financial institutions during times of market stress.
When looking more broadly at the fixed income market, Jeremy says fixed income continues to provide a wide level of dispersion across different asset classes and has a definite role to play in a portfolio as a diversifier.
“When considering all these factors, we’re definitely not calling for the end of U.S. exceptionalism, but we accept that in an increasingly disrupted and fragmented world, there is a wide range of solutions and outcomes that advisers need to consider as part of their portfolio construction process.”
We’re definitely not calling for the end of U.S. exceptionalism, but we accept that in an increasingly disrupted and fragmented world, there is a wide range of solutions and outcomes that advisers need to consider as part of their portfolio construction process
Don’t forget alternatives
Alternatives — like real estate, infrastructure, private markets, and hedge funds — can also enhance the diversification of a portfolio, whilst boosting returns and lowering portfolio volatility. For example, real assets (like tollways and rents on property) can provide investors with inflation protection, as the value and income streams of these assets often rise alongside inflation.
“Diversification within a portfolio remains an investor’s best defence in these uncertain times,” says Kerry. “And remember, while cash is great for liquidity for allocating when market conditions get better, cash is not what we hold as a defensive asset during volatile periods, particularly when geopolitics rears its ugly head.”
Kerry cites J.P. Morgan research which shows that after market shocks, a 60/40 portfolio beats cash 75 per cent of the time by an average of 7 per cent after one year, and 100 per cent of the time by an average of 22 per cent after three years.
“So, remember, hedge the risks you can see, and diversify for those you can’t,” he says. “You can overcome the risk of geopolitics by diversifying and building a robust portfolio with an appropriate asset mix. This allows you to diversify for the future, for those risks you can’t see today.”
About
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.