The End of Western Geopolitical Hegemony?

While US hegemony has long been the norm, large-scale geopolitical changes are afoot that may alter the playing field when it comes to financial matters, says Philippa Malmgren.

In a recent Take 15 interview with Ron Rimkus, CFA, Malmgren, founder of DRPM Group, breaks down the perplexing term “geopolitics” and discusses how the phenomenon and current trends in the geopolitical landscape can impact investors.

“We are in a transition,” Malmgren says. “And it’s happening partly because Russia, China, and other emerging markets are saying this whole post-World War II economic construct that was a US dollar-underpinned world economy, with US-led institutions like the World Bank and the IMF, and a US philosophy that this served everybody’s interests, is actually not working for them now.”

Malmgren points to the financial crisis as “the moment that revealed that everybody’s interests were actually different.” She goes on to state that, “the US and the industrialized world spent most of the time trying to repair those institutions and that post-war international financial architecture, whereas Russia and China are spending all their time trying to create a new version of it.”

While the rise of Russia and China certainly isn’t news, the measures these nations are taking to avoid Western financial institutions are less discussed. “The money that emerging markets used to have from their savings no longer will go into the US Treasury market, or the British gilt market, or Western debt markets,” Malmgren says. “Now it’s going to go directly into building infrastructure that serves the interests of those nations, which may or may not serve the interests of the US and Europe, for example.”

Malmgren also explains how investor reliance on benchmarks can be problematic. “All the benchmarks and the indices — like the MCSI, for example — they’re all based on countries,” she says. “But in fact, countries aren’t really a sensible way to invest, especially in a world where the borders are more and more fluid.” She cites the border between the United States and Mexico as an example of an ambiguously defined region where the economics of both countries are inextricably linked.

Nevertheless, emerging markets such as Russia and China will experience difficulties of their own. “The bigger issue is what happens if there’s success in unleashing inflation,” she says. “That is a big problem for emerging markets. That gives them social unrest.”

Such potential dilemmas are also important for investors to keep in mind, especially while navigating the fluctuating financial circumstances in both the East and the West.

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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.