Strategy Autonomy and Diversification: A Resilient Approach to Global Conflicts

We often talk about the benefits of diversifying investments as a strategy to spread risk. However, in global conflict, does diversification really hold up?

As, yesterday, in #AaGeKiBaat hosted by Anil Ghelani, CFA , I spoke about strategy autonomy—an increasingly important concept in today’s interconnected and volatile world. Strategy autonomy allows businesses and economies to safeguard themselves by reducing reliance on unpredictable or hostile regions, ensuring they can continue functioning despite global disruptions. This is especially critical during crises like wars, trade conflicts, or supply chain breakdowns, where overdependence on certain countries or sectors can severely impact operations and investments.

• During times of geopolitical unrest, like wars or economic sanctions, markets become volatile, and interconnected global supply chains can be severely disrupted.
• Traditional diversification, which might involve spreading investments across industries or geographies, faces unique challenges.
• Global conflicts often expose the vulnerabilities in these strategies.

For instance, regions heavily dependent on trade or energy imports may suffer more, leading to correlated declines in asset classes that were previously considered independent.        

However, diversification still offers protection, albeit in a more nuanced way.

Rather than focusing purely on geographic or sector diversification, investors can look towards diversifying into more resilient asset classes, such as commodities or safe-haven assets like gold, which tend to perform well during crises.

As recent shifts have shown, a key part of diversification is also ensuring exposure to assets that are less susceptible to geopolitical risks, such as digital or localized assets.

The concept of strategic autonomy plays an important role here. Strategic autonomy allows firms and countries to be more resilient during crises by reducing dependencies on unreliable or adversarial partners.

For example, Europe is moving towards reshoring production and diversifying away from single-country dependencies, as seen in its approach to energy supplies and clean technologies. This reduces the risk of overexposure to one particular region, much like how diversification reduces exposure to any one asset class.

• Incorporating strategy autonomy into a diversification approach helps ensure that an investment portfolio is not overly reliant on specific countries or assets that could be jeopardized in a conflict.
• Balancing efficiency and resilience becomes crucial during global crises, and this is where strategy autonomy and diversification intersect to manage risks effectively.

In times of global conflict, traditional diversification across industries and countries can become less effective as geopolitical tensions can trigger synchronized market downturns.

Here are a few examples of how diversification, along with strategic autonomy, can help manage risks:

• Commodities as a Hedge: Commodities such as gold and oil have historically acted as safe havens during global crises. During the 2008 financial crisis and the COVID-19 pandemic, gold prices surged as investors sought stability. Similarly, oil prices fluctuate depending on geopolitical events, but they often become valuable in times of energy shortages caused by conflict. Incorporating these assets into a portfolio can reduce risk when other sectors are facing a downturn.
• Geopolitical Decoupling: As the war in Ukraine demonstrated, energy dependencies can wreak havoc on economies reliant on imports from conflict regions. Europe, which had been highly dependent on Russian gas, suffered disruptions when supplies were cut. Diversifying energy sources—through a mix of renewable energy, liquefied natural gas (LNG) from different suppliers, and local production—reduced the shock for many European countries. This lesson extends to investing: by diversifying across different types of energy stocks or funds, investors can avoid being too exposed to any single energy source.
• Technology and Digital Assets: With global conflicts sometimes leading to sanctions or supply chain disruptions, technology assets can either benefit or suffer. For instance, companies involved in cybersecurity, digital infrastructure, or data centers may see growth as governments and businesses shore up their defenses in times of conflict. This became apparent during the Russia-Ukraine conflict when cybersecurity stocks surged. Similarly, digital assets like blockchain technology, which is decentralized, can offer a layer of insulation against geopolitical risks.
• Localizing Production and Supply Chains: A major theme during the COVID-19 pandemic and subsequent global conflicts has been the shift toward local production and "friend-shoring" (relying on allied countries for production). Investing in companies that are reshoring manufacturing or building resilient supply chains can be a safer bet during periods of instability. For example, countries like the U.S. have incentivized local semiconductor production to reduce dependence on imports from geopolitical hotspots like China.
• Government Bonds and Treasury Securities: Government bonds, particularly U.S. Treasuries, are considered safe investments during crises. When stock markets face turmoil due to geopolitical tension, investors often flee to bonds for stability. By maintaining a portion of their portfolio in government securities, investors can cushion the impact of broader market volatility.
• Emerging Markets Diversification: While some emerging markets may be more vulnerable to global instability, others, particularly those not directly involved in conflicts, can offer growth opportunities. Additionally, during the U.S.-China trade tensions, some Southeast Asian nations saw growth as companies shifted production away from China.

Strategy Autonomy and Diversification During a Crisis, In Crux

Strategic autonomy strengthens diversification by ensuring investments are not overly reliant on any one region or sector, especially in uncertain times. During a crisis, governments and companies often take measures to reduce dependencies on foreign supply chains, raw materials, or technologies from potentially hostile nations. This approach complements diversification by spreading risks across self-reliant or less geopolitically sensitive industries.

while global conflicts create challenges, diversification—when coupled with strategic autonomy—can still work. The key lies in adjusting the diversification strategy to include resilient assets such as commodities, government bonds, technology stocks, and local production-focused companies. By adopting this more dynamic form of diversification, investors can better navigate the uncertainties of geopolitical crises.