Deglobalization and Megatrends: Time to Check Your Diversification?

How diversified is your global equity portfolio really? Finding that out can be like peeling back an onion’s multiple layers to find its center. Allocations based solely on geography, industry and asset class can result in unexpected exposures and less diversification than intended. Deglobalization and megatrends, both increasingly shaping investing in recent years, have rendered traditional assessments of diversification less reliable.

Ways to start peeling the onion

One angle could be how investment themes weave through a portfolio. Using MSCI’s thematic-investing framework, we observed, for example, that while firms in the U.S. and China have some of the strongest and most-diverse exposures across themes, other regional markets — perhaps less obvious — can also be viewed as “broad innovators,” having exposure to multiple themes. These include Israel, Korea, Switzerland and Taiwan. This insight, for those seeking to invest in a particular theme, might encourage looking further afield than the usual regional suspects.

With rising geopolitical tensions, understanding how the geographic revenue exposures of stocks listed in a regional market may be impacted by developments in other markets where they earn revenue has become more important. As companies increasingly adopt strategies to rewire supply chains and shift operations to new regions, structural changes may underlie changing economic exposures.

Using the MSCI Economic Exposure dataset, we analyzed how globally integrated a market was as of Dec. 31, 2023. For example, the U.S. had more than a 20% revenue exposure to emerging markets, while nearly 40% of Taiwan’s revenues were linked to the North America region. Understanding the geographic revenue distribution of a market could aid in constructing and managing global portfolios.

The dynamic forces of deglobalization and megatrend themes have reshaped the investment landscape and, in turn, impacted global equity portfolios. Looking beyond the traditional assessments could help ensure your portfolio is adequately diversified.