Recap: 2024 Davos CEO Roundtable

Geopolitical uncertainty is disrupting business and investing at a scale not seen in decades, including war in Ukraine and the Middle East, tensions in the US-China relationship, and polarized domestic politics in many countries, including the United States.

In prior discussions, we’ve learned that CEOs assess geopolitics mostly in terms of risks – commercial, reputational, and organizational – and the trajectory of those risks. As the landscape continues to change, participants broke down these risks, as well as long-term opportunities and responsibilities, in today’s turbulent geopolitical environment.

The cross-border risk premium has gone up.

“Supply chain risk, sanction risks, or regulatory risks mean we need to be careful about leaving capital in certain areas.“

For leading investors and corporates, geopolitical effects are an inescapable consideration to any new capital allocation decision given the current landscape. As one participant put it – “Risk avoidance is not an option for us, it’s all about risk management.”

Now, entering a new geography requires the expectation of a clearly superior return to existing geographies. Some in the room expressed reticence to expand into new markets due to the higher risks involved, a sentiment reaffirmed by a recent EY survey of 100 global CEOs:

99% said geopolitics are affecting their decision-making.
40% said geopolitics are delaying planned investments.
37% said geopolitics are forcing them to stop planned investments.

Engaging with governments to foster partnerships and understanding is the most direct way to assuage these concerns. Corporates have been doing this for years, but it is a relatively novel pursuit for the investor community. “I’ve never had to go to Washington until the last 5 years,” said one participant. Such engagement is now critical to bridging the divide between the spheres of geopolitics and global investment.

Not all crises are created equal.

“Geopolitical events were previously buying opportunities for investors. They always created good opportunities. That has changed.”

While flare-ups of geopolitical turbulence have become more frequent in recent years, each must be assessed for its strategic importance to the specific organization. Although critical to the global discussion, the wars in Ukraine, in Gaza, or other locations will have varying impacts on the organization or portfolio depending on current or future exposure to that sector or location. This concept came to the forefront later in the week as border skirmishes between Iran and Pakistan made headlines. While a cause for concern, whether strategies or portfolios must be adjusted in light of this news is entirely dependent on the factors above.

Investors confronted with geopolitical uncertainty reported they are struggling to distinguish short-term noise from long-term trends. For the last several decades, investment behavior has more frequently responded to geopolitics rather than actively anticipating it. This approach was appropriate as geopolitical shocks were mostly temporary fluctuations. Now, there will be structural change as alliances and alignments are rewired.

No one is unaffected by the US-China relationship.

As the relationship between the world’s two largest economies evolves, the effect on the corporate and investment community is near-universal. The US-China relationship has had a “fall thaw,” as one participant put it: fundamental disagreements still exist, but there could be some relief in 2024. Over the long term, however, the consensus was that cross-border investments there will decrease over time. The transition to a multipolar world, coupled with rising protectionism, supply chain realignment, national security investment laws, and increased regulatory scrutiny add layers of complexity that all long-term companies and investors must grapple with.

In response, where some firms are maintaining but not expanding their current footprint in China, others are scaling back investment or finding ways for indirect investment in the area. For corporates specifically, the “China+1” strategy remains a viable option to circumventing supply chain slowdowns. A clear approach in this regard will be even more necessary if current economic blocs continue to consolidate.

All geopolitics is local.

“Being hyperlocal in each market, the politics and regulations change; what might have been a path to liquidity can quickly change. Nimbleness is so important.”

As half the world will head to the polls in 2024, domestic politics will play a major role in determining future policy. Companies and investors’ home government policies can either exacerbate or diminish the effects of geopolitical fragility. As past alignments and agreements are fracturing, governments are putting an emphasis on self-reliance. Nationalism and the desire for more autonomy were highlighted as trends to watch by participants in the room. In response, corporates are strengthening regional supply chains and “building local for local” – growing local supply to serve local customer bases – as international supply chains become harder to maintain.

Disparate sanctions regimes and climate policies make it difficult to scale decisions across multiple jurisdictions. One participant viewed inconsistent governmental approaches to climate as “the biggest variable of them all.” Some nations prioritize ambitious green initiatives, opening investment opportunities in renewables and sustainability, while others lag in environmental commitments, posing risks for industries reliant on fossil fuels. This policy divergence introduces uncertainty as investors navigate varying regulatory frameworks, incentives, and penalties. Meanwhile, companies adapting to stringent climate regulations become attractive investments. Investors must stay attuned to shifting climate policies, strategically aligning portfolios with jurisdictions emphasizing climate resilience and sustainability.

Through this conversation, it is clear that the global business community is grappling with complexities not seen in decades. As the world witnesses increasing tensions in key regions, the traditional notion of geopolitical events as strictly opportunities is no longer applicable. In this evolving landscape, the ability to remain both predictive and responsive is paramount. FCLTGlobal will continue to research this issue to explore how business leaders and investors can proactively confront geopolitical events and uncertainties while developing resilient strategies for long-term investment.