When a headline about a military strike, a trade dispute, or a collapsing currency threatens to undermine investors’ convictions, they have relied on a version of conventional wisdom for decades. In general, geopolitics generates noise, markets absorb it, and earnings—rather than events in locations that most portfolio managers couldn’t locate on a map without help—determine long-term returns. For the majority of the post-Cold War era, that framework functioned fairly well. In 2026, it will be more difficult to maintain composure.
The change is clearly visible. Over the past 12 months, gold has increased by more than 74%, driven not only by concerns about inflation but also by a deeper issue: investors around the world are becoming less inclined to view US Treasuries as the default store of safety that they once were.
Anyone holding US assets without currency hedging has seen their returns erode due to the dollar’s noticeable decline. For example, after accounting for the currency drag, UK investors in the S&P 500 last year received just half the headline USD return. That’s not a fleeting blip. Anyone who pays attention to the numbers beneath the narratives can see that this is a slow-motion repricing of confidence.
Building a portfolio that truly responds intelligently to the environment rather than merely reacting to it requires an understanding of the shift’s several distinct causes. The first is the structural shift in the way the US conducts business with other countries. The Trump administration’s use of tariffs as a foreign policy tool—against China, Europe, and Canada—is not acting like the transient trade tensions of earlier cycles. Supply chains are being reshaped, risk in particular industries is being repriced, and a general uncertainty premium is being created that investors and businesses must factor in for the long run rather than just the upcoming quarter.
The second reason is the US-China AI rivalry, which has put Taiwan’s future, chip export regulations, and semiconductor policy at the center of geopolitical risk assessments in a way that was not the case five years ago. Because Washington was comfortable with the situation, the $280 billion Chips and Science Act was not passed.
As this develops, the more intriguing question for investors is not whether geopolitics matters—that debate appears to have been settled—but rather how to position for it without being too late and having to pay more for assets that have already moved. The obvious example is gold. Although there is a compelling argument to hold some gold as a geopolitical hedge, the price has also increased by 74%.
A tried-and-true method of capturing an asset’s downside without much of its upside is to buy the consensus trade after the majority of the move has occurred. The same caution applies to defense stocks throughout Europe, which have risen dramatically as NATO members scrambled to fulfill their spending obligations, Germany declared an almost limitless defense budget, and the continent realized that US security guarantees are no longer as unconditional as they once appeared.
The trade in geographic diversification, which has been steadily growing, offers a more intriguing and possibly less crowded opportunity. In just three months, inflows into ex-US equity strategies have increased by over $2.5 billion, reversing the years-long trend of money going primarily into US mega-cap technology. In particular, European stocks are providing something that took years to fully materialize: real margin expansion rather than merely hope-based valuation re-rating. A steepening yield curve has helped banking stocks. Spending on defense is attracting investments in related technologies.
European markets’ stock-level dispersion is exceeding historical averages, favoring active strategies over passive index exposure. Similar things are happening in Japan, where the Tokyo Stock Exchange’s efforts to improve capital allocation, simplify conglomerate structures, and wind down cross-shareholdings are finally showing up in domestic companies’ earnings rather than just in analysts’ notes about possible reforms.
A separate, and possibly cautionary, mention should be made of the private credit market. Due to its consistent yield and lower volatility than public debt markets, it has grown to $2.1 trillion globally and drawn significant institutional capital. When rates were low and the geopolitical climate was stable, that assumption held fairly well. As of right now, neither condition is applicable.
The headline default rate of about 2.1 percent, according to Robeco analysts, probably understates the actual stress, with a shadow-adjusted figure closer to 5.4 percent once liability management exercises and distressed restructurings are appropriately counted. As AI disruption puts pressure on software business models, the market’s strong exposure to technology companies—which is more concentrated than most investors realize—adds an additional vulnerability. This market might do better than the bears anticipate. However, the geopolitical premium has not been sufficiently factored into the headline figures.
The truth is that building a portfolio around the geopolitical premium without going over budget necessitates more discipline and patience than the current environment offers. Even at high prices, some exposure to gold makes sense because the factors that are driving it—the US fiscal trajectory, the erosion of the dollar, and the declining credibility of Treasuries as neutral reserve assets—are not going away anytime soon.
Despite the recent inflows, geographic diversification away from the US mega-cap concentration makes sense and is likely still early. The earnings-driven rerating potential of European and Japanese stocks has not yet been fully reflected in prices. Although entry points are important, defense and semiconductor infrastructure are structural stories. Furthermore, private credit should be examined more closely than it is at the moment, even though its yield may seem appealing. Although the precise outcome of the current cycle of geopolitical disruption is still unknown, there is a growing perception that investors who view it as background noise rather than a structural variable will find it more costly to hold that opinion.
