Navigating Investment Risks in a Declining Global Democracy

Well, after the most election heavy year in recent history, democracy has hit a record low worldwide.

The Global Democracy index score is at the lowest point in the history of the Economist Intelligence Unit's annual democracy index.

But with global democracy facing a decline, investors need to understand the risks posed by authoritarian regimes, not to mention the hidden risks that lie beneath the surface.

Well, joining me to talk the link between democracy and long-term investment performance is Drew Miyawaki, SVP and director of manage Investment solutions at Westwood.

Drew, thank you so much for joining me.

Thanks for having me.

Well, we know that this year there has been a lot of politics and geopolitical uncertainty, but when it comes to democracy, how does this actually It affects the global investment landscape.

Sure, obviously the markets are so tied together globally and investors really need to understand the risks that these that these markets that are under non-democratic rule opposed to their portfolios.

Both the direct and the indirect exposures are important to examine.

The direct investment is an easier one to solve for.

Simply just don't own companies that are operating in authoritarian markets such as China and Russia.

Those are two of the biggest ones.

But the more subtle impacts can be seen in the indirect exposures that the rest of the portfolio constituents have to those markets that you're trying to avoid.

Yeah, and Drew, can you break this down for us?

So you mentioned both the direct as well as indirect exposure.

What does this actually look like when it comes down to numbers?

Sure, there are a few, a few products out there available now that just deal with the direct exposures, so they just take out a market such as China.

So you can get exposure to the emerging markets minus China.

But that oftentimes results in unintended consequences.

You perhaps go overweight at Taiwan or overweight Korea or overweight India.

That might not have been your intended consequence.

And so you need to be considerate of that.

So there's a there's a more subtle, a more nuanced approach that can be done when removing a specific market and then reallocating the portfolio.

That needs to be considered and then there is the indirect exposures that the companies that you're still investing in have to those markets.

So there are plenty of Western companies that operate with with with high exposures to the Chinese economy or the Chinese market and others like it.

And of course another area that we're keeping a close eye on is the war between Ukraine and Russia.

So when sanctions happen, how does this affect investment performance?

Yes, exactly.

The index world historically has been very reactive.

So the large index providers, they, they determine whether a country is considered developed, whether a country is considered emerging, and whether that that country gets included in their index.

When there's a geopolitical event and sanctions were applied to Russia, then the market has to react and the index provider has to remove that market or deem it uninvestable.

That poses a big problem for investors that are in those index funds because the portion of the investments that was that was tied to that market are now frozen and it's very difficult to move and be nimble and be dynamic in your portfolio decisions, so.

If you're considering the risk of authoritarian markets, these are these are markets and economies that do not operate free democracies, then you need to you need to be considerate of not only the direct but also those indirect exposures throughout the rest of the portfolio so that when a geopolitical event occurs, you can be responsive and reactive to that.

And so for investors out there who are looking at where US markets are right now, the major US stock averages are close to all-time highs.

Yet again, despite some of the uncertainty and geopolitical and political tensions that are affecting the markets, not to mention tariffs uncertainty as well.

But for investors out there who want to increase their exposure to democratic countries but without falling into this trap of overexposure to certain sectors or one region, what can they do?

Thanks for asking.

We have an ETF that's that's traded just just around the corner here at the New York Stock Exchange.

This sticker is BFRE Bree.

So this is a global fund that invests in both.

Developed and emerging markets, democratic developed and emerging markets.

It avoids direct exposures to authoritarian markets and it and it penalizes the rest of the portfolio whose stocks are highly correlated to those markets as well.

So this is a pro-democracy investment that is global, that is dynamic, that is thinking about not just the Russia of yesterday or the China of today, but perhaps the geopolitical concern of tomorrow.

And Drew, finally, just say you had started hibernating the beginning of this year before Trump 2.0 and you miss all the volatility across the markets and you wake up as we head into the second half of 2025.

What do you actually do when it comes to preparing for risk as we head into the second half of the year?

Yeah, well, one thing we do know, you touched on it at the beginning is that global democracy is in decline, and that is a risk to investment portfolios around the world.

And so this is a thoughtful, thoughtfully designed, thoughtfully constructed methodology that looks to alleviate some of these geopolitical risk and uncertainty that's happening now.

And very quickly, Drew, before I let you go, in terms of key catalysts, you're keeping your eye on, what are they?

It's the geopolitical, it's the geopolitical climate right now.

There's an interesting index out there that you can follow that's a geopolitical uncertainty index.

We're seeing spikes, you know, close to all-time highs like you mentioned for our for our equity indices, but we're also seeing those spikes at all time highs for geopolitical uncertainty, and I think that's one of the bigger drivers that investors are concerned about right now.

Well, Drew, a lot to keep our eyes on, so thank you so much for breaking this down for us.

Thank you so much.

Thank you.