Approximately 25% of global GDP, including a significant number of strategic and high-tech sectors, is deglobalizing, according to the report. While representing only one-quarter of global GDP, these industries feed into many other industries.

“Our list includes AI, high-end semiconductors, 5G telecom networks, critical minerals, oil and natural gas, EVs and batteries, the military sector, and certain parts of the biotech sector,” says Taimur Hyat, PGIM’s COO and one of the report’s authors.

“This 25% of the global economy really punches above its weight,” says Shehriyar Antia, PGIM’s head of thematic research and another of the report’s authors. “Chips, critical metals [and] energy, for example, are all inputs into a wider range of industries and goods.”

Portfolio Considerations 

The report noted multiple portfolio-wide implications of the dual-track era. Among those will be national winners and losers from industries like manufacturing and mining, resulting from larger powers seeking to reshore and near-shore critical industries. Countries set to benefit are those with existing industrial capacity that can be more attractive for reshoring and near-shoring activities.

“As more sophisticated manufacturing leaves China, it has to go somewhere and one of the most natural places to go are places where there’s already some simple manufacturing,” Antia says.

For example, India is a producer of basic electronics and pharmaceuticals but could become a winner in more advanced electronics and biologicals. Costa Rica, which has some basic semiconductor supply chains and manufacturing infrastructure in place, is in a good place to leverage its existing infrastructure for expanded investment.

“Even a few contracts from multinational companies can have an outsized impact on their economy, fiscal balances and credit ratings,” the report stated.

According to PGIM, investors should focus on countries with access to free-trade zones. Poland, with its access to the EU, and Mexico are two examples. Countries that offer comparative advantages in their business environments and labor costs like India and Vietnam are also set to gain.

For manufacturing, PGIM listed India, Malaysia, Thailand, Vietnam, Czechia, Hungary, Morocco, Poland, Colombia, Costa Rica and Mexico as such winning countries. Meanwhile. Australia, Indonesia, Morocco, South Africa, Zambia, Brazil, Chile and Peru are set to be winners in minerals and metals.

In the report, PGIM emphasized the need for CIOs to stress-test portfolios for various geopolitical scenarios, such as a 50% tariff on all goods from a specific country or the shock of an invasion. According to PGIM, stress tests are important to understand portfolio exposure to at-risk sectors and countries, as well as to assess whether firms are adequately prepared for risks.

Strategy Considerations

The report also stated that CIOs should consider option-based portfolio strategies to address idiosyncratic risks of a fragmenting global economy, rather than only leaning on portfolio diversification as a hedge against volatility. Two such examples are asymmetric convexity strategies—using long-dated options in a multi-asset portfolio as part of a long-term strategy—and “defined outcome” strategies—cap-buffer structures as downside protection. 

The report noted that volatility driven by economic policy uncertainty could drive asset correlations higher, derailing portfolio diversification assumptions.

“Though it remains uncertain how the global economy evolves from here, one thing is clear: the Dual-Track Era of globalization is altering the macro and investment landscape,” the report stated. “It is up to investors and their asset managers to have the short-term flexibility and long-term vision to capture the emerging new opportunities while also navigating the dynamic risks and vulnerabilities.”