Geopolitical rupture in Europe: long-term investment implications

In addition to precipitating a devastating humanitarian crisis, Russia's invasion of Ukraine has sent ripples across markets and raised significant questions for investors over the long term. To name but a few:

• Can the US dollar retain its dominant reserve currency status?
• How should responsible investors approach geopolitical risk?
• And how will de-globalisation shape the world economy?

We continue to research the many possible answers – and assess what they mean for how we invest on behalf of our clients, with the aim of meeting their long-term objectives.

In our CIO spring update, teams from across LGIM shared some of our analysis. These include the following key points:

• To avert the threat of stagflation, central bankers face their biggest dilemma since the 1970s
• The US dollar is likely to remain the reserve currency of choice for the foreseeable future, but faces a long-term challenge
• We see the overall impact of de-globalisation as higher costs and lower margins

Regarding long-term political trends, whose intersection with markets can reshape the investment landscape, we expect populism, and populist leaders, to remain a force even as NATO and European unity strengthen.

We also note that the conflict has presented significant challenges for policymakers as they seek to balance the squeeze on consumers, and the urgent need for energy security, with the mission to avert a climate catastrophe.

Country risk

These challenges clearly have important implications for responsible investors, such as LGIM, as we assess the climate strategy and action undertaken by companies in which we invest on behalf of our clients.

At the same time, many investors are re-thinking how they judge defence companies against environmental, social and governance (ESG) standards, as the conflict shifts perceptions around national and international security. A similar process is underway regarding the question of how to assess countries against ESG metrics; a key task for the entire asset-management industry is to ensure any framework used to this end is transparent, robust and can be applied to all countries.

At LGIM, our Investment Stewardship and Investment teams are researching how just such a framework could operate in practice, covering areas from human rights, to conflicts and sanctions, to the rule of law. Given the sensitive and often complex nature of these issues, this work will involve discussions with our clients, industry peers and leading non-governmental organisations.

What is clear now, though, is that we need to remain humble and nimble as we utilise our evolving opportunity set, informed by the long-term perspectives detailed in our CIO spring update, and seek to fulfil our purpose: to create a better future through responsible investing.

Listen to Sonja’s views on recession risk and responsible investing in this month’s CIO call