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2024 GLOBAL RISK REPORT

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RESILIENT INVESTING
AMID GEOPOLITICAL
UNCERTAINTY

Fall/Winter 2024-2025

For professional investors only. All investments

involve risk, including possible loss of capital.

PGIM | 2024 GLOBAL RISK REPORT 1

 About PGIM
PGIM is the global asset management business of Prudential Financial, Inc. (PFI). In 41 offices across 18
countries and jurisdictions, our more than 1,400 investment professionals serve both retail and institutional
clients around the world.

As a leading global asset manager, with $1.33 trillion in assets under management, PGIM is built on a
foundation of strength, stability, and disciplined risk management.* Our multi-affiliate model allows us
to deliver specialized expertise across key asset classes with a focused investment approach. This gives our

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clients a diversified suite of investment strategies and solutions with global depth and scale across public and
private asset classes, including fixed income, equities, real estate, private credit, and other alternatives.

For more information, visit www.pgim.com.

* PGIM is the investment management business of Prudential Financial, Inc. (PFI). PFI is the 12th largest investment manager (out of 411 firms surveyed) in terms of
worldwide institutional assets under management based on Pensions & Investments’ Top Money Managers list published June 2024.

2 2024 GLOBAL RISK REPORT | PGIM

CONTENTS

03 | INTRODUCTION

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04 | CAN MARKETS ABSORB AN ONSLAUGHT OF SHOCKS?

06 | AVOIDING A FAILURE OF IMAGINATION

09 | GEOPOLITICAL RISKS AND THE INVESTMENT OUTLOOK

11 | INVESTMENT STRATEGIES FOR AN UNPREDICTABLE WORLD

18 | CONCLUSION

19 | ACKNOWLEDGMENTS

PGIM | 2024 GLOBAL RISK REPORT 1

 DRAFT
Great power competition itself is a reason that we will more likely see a divergence of
economies under a potential confrontation between great powers.”
MEHILL MARKU
Lead Geopolitical Analyst,
PGIM Fixed Income

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INTRODUCTION

As the global economy emerged from the COVID-19 pandemic, the world looked far different than it did before.
Supply-chain bottlenecks, rampant inflation, and interest-rate hikes are only part of the story. Major wars
in Europe and the Middle East, trade conflicts, the weaponization of economic statecraft, and intensifying

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competition over military and technological superiority each amplified the impact on the macro and geopolitical
landscape. Taken together, these events might be signs of a fragile world order and a growing threat level from
global risks, the likes of which investors have not faced in decades. Policy shifts that stem from a long list of
major elections in 2024 inject even greater uncertainty into the policy outlook.

48%
The world is changing more rapidly and in ways that
can be hard to predict. The frequency of unexpected
political and economic shocks has accelerated, forcing
investors to reassess their market views just as frequently.
More risk often comes with opportunities for more
reward. While geopolitical turmoil portends greater
INSTITUTIONAL INVESTORS
volatility, history has shown that periods of volatility
are moments for long-term investors to deploy capital.
WHO SAY THERE ARE TOO
So, investors face a dilemma. MANY GEOPOLITICAL RISKS TO
The range of possibilities in today’s geopolitical climate
appears unpredictable, if not infinite. Frequent changes
EFFECTIVELY MITIGATE THEIR
to the portfolio in response to new risk assessments PORTFOLIO IMPACT.
come with higher costs and may cause investors to
miss out on opportunities. Reducing risk tends to limit
potential reward. As a result, some investors feel the
best course of action is to focus on trends that are more
predictable or quantifiable—and deal with geopolitical However, investors’ toolbox is not empty. With the
surprises only after they transpire. right strategies, they can both manage risk from
geopolitical turmoil and position their portfolios to

56%
capture opportunities.
In this uncertain environment, PGIM set out to
uncover how geopolitical risks are changing the way
institutional investors are constructing their portfolios.
PGIM surveyed 400 institutional investors across

INSTITUTIONAL INVESTORS WHO eight countries and representing $9 trillion in assets

under management. The results captured a growing
SAY THE THREAT LEVEL FROM sentiment that while geopolitics have emerged as the
top risk facing global markets, there remains plenty of
GEOPOLITICAL RISK IS HIGH. appetite to take on other forms of risk.

PGIM | 2024 GLOBAL RISK REPORT 3

CAN MARKETS ABSORB AN ONSLAUGHT OF SHOCKS?

Investors have faced a series of massive geopolitical shocks in recent years. And still, such shocks have not
always triggered market reactions of equal magnitude or length.
For example, energy prices skyrocketed in response to are at the center of this competition. The US,

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escalating tensions between Russia and Ukraine, and seeking to promote domestic manufacturing,
then the invasion in February 2022. By the end of the embarked on a reset in trade policy during the
same year, Brent crude prices fell back to levels seen Trump administration, which renegotiated NAFTA
before the war began—even as the conflict continues and imposed tariffs on a range of products in 2018
more than two years later. The US’s emergence as a and 2019. The Biden administration kept most of
top producer of oil and natural gas could mean that those tariffs in place, introduced new levies targeting
geopolitical shocks do not incur the same impact goods such as Chinese EVs and semiconductors,
on energy markets they once did, such as when the and restricted the sale of semiconductors and chip-
breakout of the Gulf War caused crude prices to spike. making equipment to Beijing. China has adopted
policy measures of its own to achieve self-sufficiency
In August 2024, deteriorating economic indicators
in these technologies. However, competition between
rekindled recession fears in the US and, alongside an
the two nations is not a new phenomenon and can
unwinding of the yen carry trade, contributed to a
provide investors with historical context for the
sudden selloff in global markets. Yet investor sentiment
current moment.1 Investments in related sectors have
recovered within days.
not halted, but rather shifted. US companies involved
Markets have also taken the fraught US-China in the production and design of chips have benefited
relationship, and the rerouting of supply chains, in from enthusiasm around AI, while US investments in
stride. Strategic technologies such as semiconductors China’s tech sector have narrowed.2

Reducing risk tends to limit potential reward. As a result, some investors feel the best course of
action is to focus on trends that are more predictable or quantifiable—and deal with geopolitical
surprises when they transpire.

1 PGIM Fixed Income. (2024, May 15). The US-China Competition Through Four Lenses. https://www.pgim.com/fixed-income/blog/us-china-competition-through-four-lenses.
Accessed August 2024.
2 PGIM Fixed Income. (2024, June 12). The Weaponization of Statecraft and Its Investment Implications. https://www.pgim.com/fixed-income/blog/weaponization-statecraft-
and-its-investment-implications. Accessed August 2024.

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 KEY POINTS FOR INVESTORS
Bursts of volatility
These events illustrate a shift in market dynamics. Past cycles, from the 1987 stock market crash to the 2008
global financial crisis, suffered from more severe imbalances and systemic risks. By comparison, volatility
from recent shocks may provide evidence of a different type of trading environment in which downside

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protections and a lack of market imbalances lead to sharp, but short-lived, moves in asset prices. While these
bursts of volatility add to short-term risk, they also can create more tactical opportunities for investors.3

Converging risks
There is also a prominent view among investors that given the rise in geopolitical risks and a seemingly
unlimited range of potential scenarios, it is nearly impossible to fully mitigate their impact. Some risks
may be counterbalanced by others, and being too risk averse can limit returns in a macro environment that
proves to be less turbulent than feared. It is thus difficult for markets to price in risk when multiple political
and macro drivers converge.

When managing risk in an uncertain geopolitical climate, it is critical for institutions to understand
their time horizon and liquidity needs. An institution with a very long time horizon might be able to sit
through a period of volatility, but an institution that requires instant liquidity might be more sensitive
to volatility in the market.”
JOHN HALL
Portfolio Manager
PGIM Quantitative Solutions

3 PGIM Fixed Income. (2024, August 12). Short and Sharp, But Likely Not Systemic. https://www.pgim.com/fixed-income/commentary/short-and-sharp-likely-not-systemic.
Accessed August 2024.

PGIM | 2024 GLOBAL RISK REPORT 5

AVOIDING A FAILURE OF IMAGINATION

Although recent shocks have been fleeting in their impact, investors will be left behind if they are unprepared
for the unexpected. It is critical to avoid a failure of imagination.
A fast-changing world, great power competition, to PGIM’s survey. More than half of investors globally

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and a constantly evolving policy landscape will put (56%) say the threat level from geopolitical risk is
geopolitical developments front and center when high. Fewer investors hold a similar view for other
evaluating the outlook for financial markets and the risk categories, including inflation (36%), economic
broader economy. Trade tensions between the US, growth (35%), financial markets (34%) and credit
Europe and China, military conflicts, fiscal crises, (22%). Meanwhile, 59% of investors overall agree
interest rates near post-GFC highs, and structural that geopolitical risks are having a negative impact on
changes in the global economy including new portfolio outcomes.
inflationary pressures are just a few sources of kindling However, nearly half of the survey’s respondents
that can spark the next period of market stress. There (48%) feel there are now too many geopolitical risks—
are no doubt macro imbalances that lie below the encompassing elections, trade conflicts, cyberattacks,
surface, too. In an increasingly multi-polar world, war, and beyond—to effectively mitigate their potential
unknown linkages between countries or asset classes impact to portfolios. Only 28% disagree.
could break.
It is the uncertain nature of the current geopolitical
Investors must also avoid complacency. When environment that makes it such a challenge for
normalizing risks, investors can be left exposed when investors. Risk can be predictable, such as likely policy
existing risks escalate, new ones emerge, or efforts by outcomes that follow an election. When probabilities
major actors to prevent escalation fail. are less clear, it becomes more difficult to craft the right
With geopolitics taking a more prominent role in investment strategy for a resilient portfolio.
the outlook, how can investors best prepare their “If that can happen, then so many other things can
portfolios for the risks that materialize? Are market happen,” said the investment director of a US pension
structures already fortified against geopolitical shocks, fund, referring to Russia’s 2022 invasion of Ukraine.
or are they vulnerable to the whims of regional politics “That’s the world that we’ve ushered into, whereby
and unpredictable events? It came as no surprise that typical frameworks [and] typical constructs in terms
geopolitical risk is top of mind for investors, according of relations don’t hold as strongly. Obviously, there’s

Some countries or sectors will benefit from trade diversion, and others will be impacted negatively.
One way to mitigate these risks is by identifying the pockets of value. And because there are going to
be winners and losers, don’t put all of your eggs in one basket.”
KATHARINE NEISS
Chief European Economist,
PGIM Fixed Income

6 2024 GLOBAL RISK REPORT | PGIM

Exhibit 1: Risk assessment for key factors in the next 24 months
Overall US Europe APAC Middle East
60%

50%

40%

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30%
56% 57% 56% 56%
50%
46%
43%
20% 38% 38%
34%
37% 35% 36% 38%
33% 31% 31% 31%
26% 27% 27% 27%
21% 23% 23% 23% 22% 23% 22% 21%
10% 20% 20% 20%
16% 17% 17%
13% 12%
10% 9%

0%
Currency Liquidity Climate Credit Financial Markets Economic Growth Inflation Geopolitical

Source: PGIM Global Geopolitical Risk Survey

a middle of the fairway on any given day, but the

propensity for them to break, and break badly, is much
Elections in Focus
greater than it once was even a decade ago.” Elections around the world are drawing attention as well.
Our survey found that 56% of institutional investors
Three Key Risks Emerge believe elections are a factor in portfolio decisions, and
only 20% say they don’t matter. In the UK, where the
There are three risks in particular—and their ties to Labour party took power over the summer for the first
asset prices and sectors—that investors are closely time in 14 years, nearly three-quarters of investors (73%)
monitoring. agree that elections matter. Thirty-eight percent of US
investors expect 2024 elections and their repercussions to
• First, tensions in the Taiwan Strait and South
influence portfolio changes.
China Sea is at the top of the list, with 48% of
investors identifying it as the risk most likely to “I think you can show this statistically [and]
impact global markets in the next 24 months. A econometrically. Elections are having more impact on
conflict in the region could restrict the flow of key publicly traded securities and markets. And also, that
technologies, particularly semiconductors. is why many institutions pay more attention to this
• Second, 27% view military conflict in the Middle tactical element,” according to the chairman of a Swiss
East as the greatest risk, with the potential for such pension fund’s investment committee.
an event to ripple across global oil markets and the Major anticipated events like the 2024 US presidential
broader economy. election come with opportunities to develop a
• Third, the military conflict in Ukraine remains gameplan well in advance. A lack of potential policy
a key risk for investors, particularly those in surprises in the next administration could offset
Europe where impacts to supply chains and energy uncertainty over the eventual outcome of the election
markets are more acute. The Russia-Ukraine war itself. In addition, optimism over a soft landing for the
registered a higher level of concern with investors US economy has bolstered investor sentiment in 2024
than tensions between the US and Iran. However, and supported risk assets. While fiscal stress is cause for
investors in the Middle East were split on which concern, it also puts pressure on central banks to keep
presents the biggest risk to global markets. policy rates as low as possible.

PGIM | 2024 GLOBAL RISK REPORT 7

Exhibit 2: Geopolitical risks most likely to impact global markets in the next 24 months
60%
Overall US Europe APAC Middle East

50%

40%

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30%
54%
48% 48%
45%
20%
37% 37%
30%
27% 28%
10% 21%
17%
13% 11% 13% 12% 13%
10% 9% 2%
3% 3% 2%
6% 7%
0%
0%
Tensions in Taiwan Strait/ Military conflict Military conflict US-Iran None of the above will
South China Sea in Middle East in Ukraine tensions upend markets

Source: PGIM Global Geopolitical Risk Survey

Shifts in economic and trade policy can be a catalyst for geopolitical risks on their radar, and which actions they
unexpected opportunities to deploy capital. Evidence plan to take over the next two years.
of a shift to a multi-polar world suggests a different
power dynamic, which will likely play out most acutely
in trade and investment policies, including the broader Despite a fracturing world and a heightened
use of tariffs, and the regionalization of supply chains. sense of geopolitical risk, investors say they
Even as rising trade tensions cause alarm, industrial are ready to take on risk in their portfolios—a
policy’s reemergence is driving public spending sign that institutions are taking a long-
toward new manufacturing capacity, infrastructure term view by leaning into active investing
development and supply-chain redundancies. This is and looking at volatility as an opportunity.
creating new possibilities for businesses and investors in Geopolitical risks are not a novel challenge
economies both large and small. Investors must prepare for global markets, and when looking back at
for these shifts by assessing the potential negative periods of war, market crashes and political
impacts to their portfolio, as well as asset classes, sectors upheaval, the post-pandemic world appears
or countries that could benefit. closer to the historical norm than the decade
With that in mind, investors will find that effectively following the GFC. Even so, two factors make
factoring geopolitical risks into portfolio decisions the current geopolitical landscape dangerously
requires a long-term lens. How can investors mitigate unique: The US faces a competitive military
geopolitical risks while retaining the agility necessary to and technological power in China, and Europe
capitalize on moments of opportunity? faces its first ground war since World War II
that risks upending its security order.
PGIM asked global institutional investors to describe
the actions they had taken to address some of the

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GEOPOLITICAL RISKS AND THE INVESTMENT OUTLOOK

PGIM’s survey revealed that investors have responded to geopolitical strife by taking a broad range of portfolio
actions to reduce risk exposure. Globally, 31% of investors have made allocation adjustments based on asset

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class, region, or risk tolerance. One-quarter of investors have adjusted their allocations based on sector or
management style, while 29% say they are holding more cash or other short-term investments.
The flight to safety is most pronounced in the US, going to be blindsided by the market gyrations, by the
where 41% of investors say they moved into cash to rotations. Regime shift is a thing, and when it happens
manage risk. Some of this shift can be attributed to and you are caught off guard, good luck catching up.”
how attractive cash has become ever since central banks Less than four in 10 investors say their organizations’
embarked on an aggressive rate-hike campaign to portfolios are prepared for the effects of several
combat inflation’s surge. With short-term rates reaching geopolitical events, from 2024 elections and
their highest levels since before the GFC, investors have government policies to military conflicts. Investors are
been rewarded for keeping cash on hand. least prepared for the impact of a terror attack, global
Investors are also more prone to seek liquidity in migration crises, and a conflict over natural resources.
advance of an unpredictable presidential election,
seeing the benefits of maintaining dry powder until

LESS THAN
there is greater clarity over the path for federal policies.
According to the survey, a majority of investors globally

4 IN 10
(55%) say their organizations plan to increase cash
allocations heading into elections.
The investment director of a US pension fund
explained that tactical plays can present themselves
based on elections. However, aside from exposure to
potential regulatory risk, the long-term fundamental INVESTORS SAY THEIR
thesis does not change.
“As an allocator, we’re super patient capital,” this
ORGANIZATIONS’ PORTFOLIOS ARE
investment director said. “But your cognizance around
the externalities that could present themselves means
PREPARED FOR THE EFFECTS OF
you have to have a step function there, or else you’re SEVERAL GEOPOLITICAL EVENTS.

There is a prominent view among investors that given the rise in geopolitical risks and a seemingly
unlimited range of potential scenarios, it is nearly impossible to fully mitigate their impact.

PGIM | 2024 GLOBAL RISK REPORT 9

 Exhibit 3: Portfolio readiness for geopolitical risk events in the next 24 months

Overall US Europe APAC Middle East

Overall US Europe APAC Middle Eas
60%

50%

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40%

30%

47%
47
40%
38% 38% 38% 37% 38%
20% 40%
38% 33% 38% 34% 33% 33%
3
32% 32% 33%
30% 30% 30% 30% 29% 30% 29% 33%
27% 28% 32% 28% 32% 28% 27%
26% 25% 30% 30% 30% 30% 29%
27% 22% 22% 23%27% 28% 28% 28%
26%
20% 20% 20%23% 25% 23%
25% 25%
23%
22% 22%
10% 19% 20% 20% 20%

bal migration crises 0% Natural resource Trade subsidies/disputes Supply chain disruption Cyberattack Military conflict Global debt levels
Terror attack
scarcity/conflict Global migration crises Natural resource Trade subsidies/disputes Supply chain disruption Cyberattack
scarcity/conflict

Source: PGIM Global Geopolitical Risk Survey

As an investor, you have to be prepared for more of these shocks and trade shifts. In a global sense,
broken trade links and more muted capital and investment flows may not be optimal. However, from
more of a redundancy and political economy perspective, building more security into the economy by
increasing domestic production of key products and technology actually can be beneficial.”
MAGDALENA POLAN
Head of Emerging Market Macroeconomic Research,
PGIM Fixed Income

10 2024 GLOBAL RISK REPORT | PGIM

INVESTMENT STRATEGIES FOR AN UNPREDICTABLE WORLD

Despite a heightened sense of geopolitical risk, PGIM’s survey found that one-third of institutional investors
plan to have an aggressive portfolio strategy by the end of 2025, compared with about one-quarter who say
they currently are aggressive in their risk tolerance. This risk-on mentality comes amid optimism over a soft

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landing in the US and that spillover from geopolitical events, including trade disputes and two major wars, can
be contained. Even as the world evolves, opportunities will continue to present themselves. While geopolitics
have come to the forefront, investors have grown less worried about risks that dominated portfolio decisions in
recent years, including inflation.
Predictability is also a crucial element. When investors surprise. At least two-thirds said the same when polled
have a clearer understanding of the fallout from a about the investment impacts of trade subsidies and
variety of possible scenarios, they can better prepare disputes, global debt levels, regulatory policies, and
for all outcomes. About three-quarters of institutional supply-chain disruptions.
investors say their portfolios are moderately or well- But what can investors do when the fallout from
prepared for the repercussions stemming from major geopolitical events is less certain? The right strategy will
elections in 2024, reflecting confidence that policy depend on investors’ risk tolerance, liquidity needs,
outcomes in the US and elsewhere will not come as a time horizon, and market outlook.

Exhibit 4: Portfolio risk tolerance

End of 2023 End of 2025 (expected)
50%

45%

40%

35%

30%

25%
44% 45%
20%

15%
28% 27%

10% 21%
19%

5%
5% 6%
3% 4%
0%
Aggressive Moderately aggressive Moderate Moderately conservative Conservative

Source: PGIM Global Geopolitical Risk Survey

PGIM | 2024 GLOBAL RISK REPORT 11

Markets May Not Behave Predictably resilient through market cycles or generate uncorrelated
returns. When it comes to elections, investors tend to
It is important to remember that markets may not benefit when they think beyond short-term volatility
behave in a predictable way in response to emerging tied to the outcome and adopt strategies to position their
risks. The interplay between economies is dynamic, portfolios for the medium- and long-term environment.8
and a constant state of change can lead to unexpected
market moves that shatter typical asset correlations. Volatility can create tactical opportunities
A comprehensive approach to diversification and
Busted correlations liquidity can mitigate risk by helping investors avoid

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Evolving correlations between asset classes will becoming a forced seller during unexpected events.
influence portfolio decisions. Some longer-term trends Keeping cash on hand will allow investors to be
are shifting or breaking down, and these new regimes opportunistic when markets are volatile and potentially
could hold for some time. allow them to enter the market at more attractive
In 2022, the interplay between stock and bond markets prices—even as right-timing investment decisions
exacerbated each other’s challenges amid a broad remains a challenge. These principles can form the
selloff, and the correlation between the two has become foundation of a gameplan to navigate uncharted
positive.4 Likewise, an inverted yield curve has not lived territory as the geopolitical situation unfolds.
up to its historical role as a recession signal—at least so Even expected events on the political calendar can
far. The relationship between oil and the US dollar may lead to unexpected reactions in financial markets.
also be evolving. As the shale revolution took off, the Consider the US presidential election and its potential
US’s transformation from a net energy importer to a outcomes. Investors face multiple potential scenarios
net energy exporter had implications for the traditional for control of the White House and both chambers
relationship between oil and the dollar, which is the of Congress, and they were already forced to reassess
currency of choice for most commodity trading. Rising their election outlook in response to one of the biggest
crude prices could provide support for US terms of political curveballs in recent memory when President
trade and thus could be associated with a strengthening Joe Biden announced his last-minute withdrawal from
dollar, whereas a strong oil market often coincided with the 2024 race. While market reactions to the winner
a weaker greenback previously.5, 6 The US has recorded of the presidential race may seem predictable in the
an improvement in its terms of trade since around short run, they could look quite different depending
2015,7 which is the same year lawmakers passed a bill on which party holds the majority in the House and
that lifted a ban on oil exports. Monitoring changes in Senate—and a divided government would portend
these sorts of correlations and interdependencies will few major policy changes. No matter which candidate
help institutional investors determine which assets can takes office, the US will continue to face a mounting
serve as a suitable hedge. debt crisis after several rounds of new federal spending
Quantitative models that make it possible to quickly as well as higher interest rates that pushed up the cost
detect shifts in the correlation between asset classes of servicing this debt. The long-term ramifications
and macro trends are another tool that could help keep for the Treasury market hold the potential to ripple
investors ahead of the curve as geopolitical shifts take across global debt markets and could even force
hold. Investors can also seek out solutions that tend to be policymakers’ hands.

4 PGIM. (2024, March 29). Positive Stock-Bond Correlation: Prospects & Portfolio Construction Implications. https://www.pgim.com/research/positive-stock-bond-correlation-
prospects-portfolio-construction-implications. Accessed September 2024.
5 The Financial Times. (2023, October 16). The Dollar Has Joined the Commodity Currency Club. https://www.ft.com/content/07b162c9-1b73-43fd-8c30-9dfcea7e7eb5.
Accessed September 2024.
6 Energy Intelligence. (2022, November 8). Oil and the Dollar: The New Relationship. https://www.energyintel.com/00000184-566e-dc1b-a9a4-d66e06950000. Accessed
August 2024.
7 Federal Reserve Bank of St. Louis and US Bureau of Economic Analysis. GDP: Terms of Trade Index. https://fred.stlouisfed.org/series/W369RG3Q066SBEA. Accessed
September 2024.
8 PGIM Quantitative Solutions. (2024, August 15). Managing Through Election Cycle Volatility & Beyond. https://www.pgimquantitativesolutions.com/white-paper/managing-
through-election-cycle-volatility-beyond. Accessed August 2024.

12 2024 GLOBAL RISK REPORT | PGIM

Geopolitical Expertise to Identify Winners the portfolio from the bottom-up by considering
existing sector and company exposure to international
and Losers customers and supply chains, as well as foreign
exchange impacts on earnings.
Remaining diversified could help fortify portfolios
against unpredictable vulnerabilities, avoid the risk of a Geopolitical analysts can offer expertise on how
concentrated shock, and mitigate unforeseen impacts as global power structures and economic policies
winning and losing countries, sectors and asset classes are evolving—a particularly valuable source of
shake out in a new era for global trade. Exposure to insight as nations seek to build influence through
a range of asset classes can also help investors blunt sanctions, tariffs, export controls and other economic

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inherent risks to markets themselves. Hidden imbalances statecraft. With great power competition showing
and reduced liquidity in financial markets have increased few signs of abating, experts on the intersection
the tendency for “flash crashes” to occur, such as the of economic and foreign policy can help investors
summer selloff of 2024 fueled by the yen carry trade. not only understand the impact to their portfolios,
When evaluating sectors, investors should take but anticipate new measures. It is important to
a macro view and consider how much policy consider how global rivalries bring both downside
goals—resilient supply chains and robust domestic and upside risk. Technology sharing, financial
production of critical supplies—will drive growth assistance through multilateral organizations, supply-
or create new headwinds. Portfolio managers should chain linkages, and business incentives are all policy
avoid relying solely on past events and market levers that can be turned on or off. As national
reactions when formulating an investment blueprint. security concerns contribute to elevated risk levels,
Instead, geopolitical expertise can help navigate a accompanying industrial policies that incentivize
changing world and identify linkages and asset-class domestic manufacturing provide a tailwind for select
implications that are less known. By identifying sectors, including semiconductors and alternative
winners in global trade, investors can uncover pockets energy. A bipartisan “roadmap” from the US Senate
of value in overlooked sectors. Investors should recommended $32 billion in annual spending to
also evaluate upside potential and vulnerabilities in support non-defense AI innovation.9,10

Commodities are not only something that could do well in a high geopolitical risk environment, but
they also could benefit from higher interest rates as well as structural forces, such as continued
demand for fossil fuels through the energy transition.”

MANOJ RENGARAJAN
Portfolio Manager
PGIM Quantitative Solutions

9 The Bipartisan Senate AI Working Group. (2024, May 15). Driving US Innovation in Artificial Intelligence. https://www.schumer.senate.gov/imo/media/doc/Roadmap_
Electronic1.32pm.pdf. Accessed August 2024.
10 PGIM Fixed Income. (2024, June 12). The Weaponization of Statecraft and Its Investment Implications. https://www.pgim.com/fixed-income/blog/weaponization-
statecraft-and-its-investment-implications. Accessed August 2024.

PGIM | 2024 GLOBAL RISK REPORT 13

 Exhibit 5: Actions to mitigate geopolitical risks

Overall US Europe APAC

Overall US Europe APAC Middle East
Very Likely
Very Likely Already Imple

41%
37%
37%

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30%
27% 27%
30% 26% 30%
29%
25%
27% 27% 23% 23% 27%22%
26% 22% 22%
21% 25% 26%
22% 26%2
20% 20% 20% 25% 25% 20% 25% 25%
23% 23% 19% 23%
22% 18% 22% 22% 17% 18%
22% 22%
17% 17%
21% 16% 16%
20% 15% 15% 20% 15% 20% 20%
13% 13% 13%
19%
13%
18% 18%
17%
16% 10%
15%
13% 8% 8%

Deploying specific Active/Passive Holding more cash Sector allocation Risk tolerance Regional/Country Asset-class allocation
S Europe APAC hedgingEast
Middle strategies allocation adjustments and/or other short- adjustments adjustments allocation adjustments adjustments
term investments
or allocation Risk tolerance Regional/Country Asset-class allocation Already Implemented Deploying specific Active/Passive Holding more cash Sector allo
justments adjustments allocation adjustments adjustments hedging strategies allocation adjustments and/or other short- adjustme
43%
41%
term investments

33% 33%
32% 32% 32%
31% 31% 31% 31%
30% 30% 30%
29% 29%
27% 27% 27%
26% 26% 26%
25% 25% 25% 25% 25%
23%
22% 22%
20% 20% 20%
19%
18%

Deploying specific Active/Passive Holding more cash Sector allocation Risk tolerance Regional/Country Asset-class allocation
hedging strategies allocation adjustments and/or other short- adjustments adjustments allocation adjustments adjustments
term investments

Source: PGIM Global Geopolitical Risk Survey

14 2024 GLOBAL RISK REPORT | PGIM

Going Beyond Traditional Diversifiers using gold as a hedge against geopolitical uncertainty,
as well as possible risks associated with fiat currencies
Deep diversification requires a broad view of asset in highly indebted countries. Physically backed gold
classes and portfolio solutions that goes beyond ETFs recorded inflows for three consecutive months
allocations to traditional conservative investment plays. through July 2024, bringing total global assets under
Some solutions can help mitigate downside risk while management to a new record of $246 billion.12 A
maintaining some exposure to the upside. Market downshift in globalization and fractured supply chains
participation strategies can combine long-term call
options with conservative investments, giving a portfolio
DATA CENTERS AT THE CORE OF

DRAFT
exposure to a larger share of the upside but still providing
downside protection. Buffered ETFs buy a series of
option contracts that have a payoff profile that blunts NATIONAL SECURITY
the impact of downturns while allowing the investor to Data centers, which have emerged as critical
participate on the upside, up to a cap. Options can also infrastructure to support the mass adoption
add downside protection. Tail-risk hedging often involves of technologies such as cloud computing and
the purchase of out-of-the-money put contracts that AI, represent a growing alternative investment
can provide a floor on returns. This can be a particularly opportunity for institutional investors. One
useful strategy for when investors anticipate a broad of the most overlooked aspects of this strategy
market selloff. An alternative strategy would be covered is the role that data centers play in national
call writing, which limits upside potential but generates security and the global battle for technological
income that can help investors weather volatile market supremacy.
environments.
The advent of generative AI has accelerated
Portable alpha overlays offer unique characteristics as an demand for hyperscale data centers, which are on
alternative allocation for institutions. A portable alpha pace to more than double globally over the next
overlay is an uncorrelated and unfunded separate source five years. From an investment perspective, the
of excess returns generated by alpha management. The imbalance between robust demand and limited
strategy is designed to layer this additional alpha onto a supply could make allocating toward data centers
portfolio that has beta exposure coming from different attractive given the corresponding upward
sources, such as futures contracts. The strategy can be pressure on rents. Concerns over data sovereignty
implemented in existing portfolios without changing and geopolitical risks also create a supportive
underlying allocations and existing active managers. backdrop for data centers. Many data centers
A well-designed portable alpha overlay strategy with a have government contracts and are crucial to
low correlation to traditional asset class exposures can keeping up in the AI arms race. Given the large
provide diversifying, additive returns when asset owners amounts of resources required to operate data
need them most.11 centers, investment is flowing toward the energy
grid, making data centers more power efficient,
Safe Havens to Counter Geopolitical Uncertainty and developing innovative cooling systems that
reduce water and energy usage. This creates
Institutional portfolios can hedge against geopolitical a broad opportunity set for investors in data
risks that manifest themselves as supply shocks by centers and related infrastructure. Demand for
allocating toward real assets such as gold, which reached data centers will make energy independence a
a record high in August 2024 amid ongoing tensions in more pronounced feature of national security in
Europe and the Middle East. Gold funds have attracted the AI age.
strong inflows in another sign of investors’ interest in

11 PGIM Quantitative Solutions. (2024, August 15). Managing Through Election Cycle Volatility & Beyond. https://www.pgimquantitativesolutions.com/white-paper/
managing-through-election-cycle-volatility-beyond. Accessed August 2024.
12 World Gold Council. Gold ETF Flows: July 2024. https://www.gold.org/goldhub/research/gold-etfs-holdings-and-flows/2024/08. Accessed August 2024.

PGIM | 2024 GLOBAL RISK REPORT 15

Exhibit 6: CBOE gold ETF volatility

50 COVID-19
pandemic
45

40

35
Russia's

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invasion
30 of Ukraine

25

20

15

10

0
8/2014 8/2015 8/2016 8/2017 8/2018 8/2019 8/2020 8/2021 8/2022 8/2023 8/2024

Source: Chicago Board Options Exchange, CBOE Gold ETF Volatility Index [GVZCLS], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.
org/series/GVZCLS. Accessed August 2024.

Taking all of the potential political and geopolitical scenarios into consideration gives us a framework
to better stress test emerging markets, and better understand different upside and downside risks
that could develop.”
CATHY HEPWORTH
Head of Emerging Markets Debt Team,
PGIM Fixed Income

16 2024 GLOBAL RISK REPORT | PGIM

could build a case for a diverse array of commodities
if trade tensions result in a more inflationary
Volatile World
environment. Higher interest rates mean bonds are An evolving state of global power dynamics calls
once again behaving like a defensive asset as well, for engaging in scenario analysis. By stress-testing
providing an opportunity to reallocate back into fixed portfolios, investors can assign probabilities to tail
income to protect against a macro downturn. risks and determine potential or likely impacts in a
variety of geopolitical scenarios. This strategy can help
Heightened geopolitical risks may be favorable to other
determine a portfolio’s vulnerabilities and mitigate
assets considered safe havens such as the US dollar,
risk from both high- and low-probability events. For
Swiss franc, and Treasuries. Despite some predictions

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emerging markets, country risks can be identified
for its decline, the US dollar remains the world’s reserve
by considering how policymakers might respond to
currency. Data show the US dollar has accounted for
changes in geopolitical relationships. Take Mexico as
88% of global foreign exchange transactions, a rate that
an example: Domestic elections in 2024 and the US
has been stable for two decades.13 Although the dollar’s
presidential race present a variety of plot lines that
share of foreign currency reserves has declined from
could play out related to tariffs and immigration.
70% at the turn of the century to 58% in 2024, central
Simulating these scenarios, and how they could impact
banks revealed plans in a survey to increase exposure
a positive story that has already developed around
to the dollar over the following one to two years.14 The
FDI flows into Mexico, will help clarify upside and
dollar may strengthen in a period of global tumult that
downside potential. PGIM’s survey found that 52%
drives investors to reduce exposure to riskier assets. The
of institutional investors plan to make adjustments
reaction in emerging markets could vary depending
to regional or country exposure in their allocations to
on each country’s economy—mainly, whether it is
mitigate geopolitical risk.
diversified or largely commodity based.

Risk Management Approaches in a More

There are returns in illiquidity, but it is also key to have the flexibility to take advantage of market
opportunities when they present themselves. Investors should thus have their radar open to both
public and private opportunities.”
ROBERT TIPP
Chief Investment Strategist & Head of Global Bonds,
PGIM Fixed Income

13 Board of Governors of the Federal Reserve System. (2023, June 23). The International Role of the US Dollar Post-COVID Edition. https://www.federalreserve.gov/econres/
notes/feds-notes/the-international-role-of-the-us-dollar-post-covid-edition-20230623.html. Accessed August 2024.
14 Financial Times. (2024, June 4). Global Central Banks Plan to Increase Dollar Reserves, Survey Suggests. https://www.ft.com/content/1be234f2-c680-4ce9-beb7-
d0d9a2793330. Accessed August 2024.

PGIM | 2024 GLOBAL RISK REPORT 17

CONCLUSION

Investors face a challenging dilemma. While geopolitical strife calls for rethinking risk management, shocks
may appear too frequent, and too great in number, to effectively mitigate their impact. But with the right
strategies, investors can construct portfolios with the goal of remaining resilient and capturing emerging

DRAFT
opportunities in a new era of geopolitical uncertainty.

Investment Takeaways can help mitigate downside risk while maintaining

some exposure to the upside. Options can also add
• Identify winning sectors and countries: Investors downside protection to the portfolio. A well-designed
can uncover pockets of value across sectors and portable alpha overlay strategy with a low correlation
regions as winners begin to emerge during global to traditional asset class exposures can provide
trade’s transformation. diversifying, additive returns when asset owners need
• Hedge with real assets: It may be prudent to increase them most.
allocations to real assets, such as gold, to hedge • Seek geopolitical expertise: Geopolitical analysts
against geopolitical risks that arise. If trade tensions can offer expertise on how global power structures
result in a more inflationary environment, investors and economic policies are evolving.
can consider allocating toward commodities. Other
assets considered safe havens, including the US dollar, • Keep dry powder: In periods of volatility, investors
Swiss franc, and Treasuries, can benefit during times with dry powder will be ready to enter the market at
of geopolitical tumult. more attractive prices.

• Stress-test portfolios: Investors can stress-test their • Monitor regime changes: Quantitative models
portfolios to determine potential or likely impacts that make it possible to quickly detect shifts in the
in a variety of geopolitical scenarios. Engaging in correlation between asset classes and macro trends
scenario analysis will help investors mitigate risk from can keep investors ahead of the curve as geopolitical
high- or low-probability events. shifts take hold.
• Utilize active strategies: Active managers with • Diversify: It’s not glamorous, but it is tried and
experience investing through a variety of cycles true. In a world where there will be winning and
can help build resilient portfolio strategies that cut losing countries, sectors and asset classes, remaining
across a diverse mix of public and private assets. diversified will help fortify portfolios against
Higher interest rates could provide an opportunity the unpredictability of policy shifts and avoid
to reallocate back into fixed income to protect concentration risk. Investors can also seek
against a macro downturn and policy shifts. Some out solutions that tend to be resilient through
solutions, such as market participation strategies, market cycles.

From mid-May to June 2024, PGIM surveyed 400 institutional investors across eight countries and
representing $9 trillion in AUM to get their perspectives on geopolitics and investing. The survey, which
consisted of a questionnaire, was supplemented by one-on-one interviews with 12 institutional investors.

18 2024 GLOBAL RISK REPORT | PGIM

ACKNOWLEDGMENTS
PGIM gratefully acknowledges the contributions of the following individuals:

Taggart Davis, PGIM

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Mao Dong, PGIM Portfolio Advisory

Guillermo Felices, PGIM Fixed Income

John Hall, PGIM Quantitative Solutions

Cathy Hepworth, PGIM Fixed Income

Morgan Laughlin, PGIM Real Estate

Mehill Marku, PGIM Fixed Income

Katharine Neiss, PGIM Fixed Income

George Patterson, PGIM Quantitative Solutions

Magdalena Polan, PGIM Fixed Income

Manoj Rengarajan, PGIM Quantitative Solutions

James Sonne, PGIM

Robert Tipp, PGIM Fixed Income

PGIM | 2024 GLOBAL RISK REPORT 19

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20 2024 GLOBAL RISK REPORT | PGIM

As I travel the world talking to our large institutional investors, their number one risk is geopolitical
and what it means for their portfolio construction.”

DRAFT
DAVID HUNT
President & CEO
PGIM

PGIM | 2024 GLOBAL RISK REPORT 21

 DRAFT THE PURSUIT OF OUTPERFORMANCETM
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