26 November 2025
In The Geoeconomic Decade, author Joachim Klement presents a compelling case that the 2020s are witnessing an unprecedented intertwining of geopolitics and economics – and that this “geoeconomic” dimension must be incorporated explicitly into investment analysis. He shows how factors such as trade conflicts, industrial‑policy shifts, supply‑chain fragmentation, energy transition and rising sovereign risk premiums can meaningfully influence asset valuations.
For CFA Society Italy members – whether asset managers, analysts or portfolio strategists – this is a call to broaden the traditional toolkit beyond macro‑economic and financial fundamentals. Understanding geoeconomic risk is no longer optional.
Key Themes and Insights
The brief begins with data: geopolitical tensions, policy uncertainty and global economic volatility are at levels not seen in decades – a trend visible in historic spikes in the Geopolitical Risk (GPR) and Economic Policy Uncertainty (EPU) indices.
From there, Klement explores how such developments can alter the fair value of financial assets. In a simplified valuation model, any sustained geopolitical event may affect either expected cash flows (e.g., through changes in demand, regulation or input‑costs) or the discount rate (via higher risk premia, inflation expectations or real rates).
Importantly, the impact is heterogeneous. Some sectors – e.g., defense, infrastructure or energy – may benefit from increased government spending or shifts in strategic priorities (as illustrated by Europe’s rearmament and related boost to defense‑industry earnings). Meanwhile, companies reliant on global supply chains or sensitive to energy/cost pressures may suffer, illustrating the asymmetric effects of the same shock.
Furthermore, the return of industrial policy and state intervention in advanced economies – from tariffs to subsidies – is reshaping competitive dynamics, trade flows, and sectoral profitability over the long term. The energy transition and divergence in adoption of renewables across regions carry not only ESG or climate impact implications, but concrete geoeconomic consequences: differences in energy‑cost structures influence competitiveness, inflation, and cross‑border capital flows.
Growing default risks and rising risk premia on traditionally “safe” assets (e.g., government bonds) – including US Treasuries – call into question long-held assumptions about refuge or risk-free benchmarks, and the potential erosion of dollar supremacy and shifts in global reserve currency dynamics, which may affect exchange rates, capital flows and emerging‑market debt valuations.
What it means for CFA Society Italy members
1. Expand your valuation framework – Traditional discounted‑cash‑flow or fundamental models must now embed geoeconomic variables. For example, when forecasting cash flows or discount rates for European equities, consider likely defense‑spending increases, regulatory shifts, supply‑chain realignment, or energy‑cost pressures.
2. Sector and geographic allocation must reflect political‑economic shifts – Industries such as defense, renewables, infrastructure, domestic manufacturing or energy may gain from structural changes. Conversely, sectors reliant on global supply chains or sensitive to cross‑border trade may become riskier. Diversification and scenario analysis become more important than ever.
3. Rethink “safe” assets and risk premia – The assumption of sovereign debt as a risk‑free anchor is under stress. Increased default risk, inflation pressures or shifts in global reserve‑currency status demand greater scrutiny of fixed‑income allocations and hedging strategies.
4. Stress‑test portfolios under alternate geopolitical scenarios – Given the asymmetric and unpredictable nature of geoeconomic shocks, scenario‑based stress testing (e.g., alternative energy pathways, supply‑chain fragmentation, trade war escalation) becomes critical to anticipate tail risks and manage volatility.
5. Stay ahead with specialized research and broad perspective – Incorporating geopolitics into investment decisions requires a multidisciplinary mindset: macroeconomics, geopolitics, ESG, energy markets, currencies. CFA charterholders are well positioned to lead this integration, combining rigorous analysis with ethical and fiduciary responsibility.
With The Geoeconomic Decade, CFA Institute Research Foundation foregrounds what many have sensed but few have systematized: geopolitics is a structural force shaping valuations, markets, and capital flows. For the 2020s, investors who ignore this dimension may find their models lacking. For CFA Society Italy and its members, the brief offers a timely – and strategically important – call to action: evolve the intellectual framework, adapt investment processes, and embrace a truly global, multidisciplinary approach to value.