Navigating geoeconomic risk in the US stock market
Geoeconomic risk has become a first-order concern for investors. This column shows that domestic US stocks expose investors to substantial geoeconomic risk through firms’ global supply-chain relations. Stocks of US suppliers decline sharply after the announcement that export controls target one or more of their Chinese customers. Mutual funds holding stocks of affected US suppliers experience higher volatility and lower returns as well. Active managers reduce holdings of affected US suppliers and other China-linked firms. Overall, understanding global linkages of portfolio firms becomes increasingly important for understanding portfolio risk.
Geoeconomic risk has become a first-order concern for investors. This column shows that domestic US stocks expose investors to substantial geoeconomic risk through firms’ global supply-chain relations. Stocks of US suppliers decline sharply after the announcement that export controls target one or more of their Chinese customers. Mutual funds holding stocks of affected US suppliers experience higher volatility and lower returns as well. Active managers reduce holdings of affected US suppliers and other China-linked firms. Overall, understanding global linkages of portfolio firms becomes increasingly important for understanding portfolio risk.
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