Geoeconomics Reshapes How Investors Should View Markets
Economists once had a word for those who thought that states should decide where microchips were made, who owned the ports and which currency would settle the oil trade, and it was a term that was far from complimentary: “mercantilists.” Geoeconomics—the use of markets as instruments of power—was filed alongside industrial policy and capital controls as a practice of governments that eschewed the rules. These assert that capital flows to its most productive use, borders are frictions, and a portfolio is a question of risk and return, not allegiance.
This is now an anachronism to its own practitioners. As America subsidizes semiconductor factories, screens outbound investment and weaponizes the dollar-clearing system, Europe, which devised the rules on state aid, has rewritten them. The International Monetary Fund spent the 1990s prising open capital accounts, but now publishes guidance on closing them. What was considered as dissent when Brazil or India executed it is now seen as “strategic resilience” in Washington’s eyes.
Investors have been slower to catch on to this than policymakers. The developed/emerging-market split is the neoliberal world-view made manifest: a rich, rules-based core where capital is safe, and a periphery where it is compensated for tolerating politics. It was supposed to be apolitical, yet a government that can freeze a central bank’s reserves, ration semiconductors or sell a social-media app is no longer a neutral backdrop for asset pricing. The premium investors once demanded for “political risk” in São Paulo or Jakarta now needs to be applied in Washington and Brussels, but still, few models do so.
Look at the countries the old map lumps together. Brazil runs some of the world’s highest real interest rates, as India runs a services economy, expensive equities and a government that liberalizes with one hand and localizes with the other. The Gulf pairs vast sovereign capital with a state-led push to diversify beyond hydrocarbons, and South-East Asia ranges from Vietnamese export factories to Indonesian nickel nationalism. Despite their capital structures, demographics and sources of growth having nothing in common, they kept their development banks, public-payment rails and fertilizer subsidies through the neoliberal interlude and were lectured for it.
The irony is that the themes attracting the most capital now exist within these places. Take energy security, which is Gulf oil, Brazilian pre-salt and ethanol, and Indian solar at a continental scale. AI infrastructure in the data centers based in Abu Dhabi and Riyadh, chip packaging in Penang and power and cooling in Chennai. Food links Brazilian soya to Gulf import dependence, Indonesian palm oil to Indian farm subsidies. Payments, too: Pix, UPI and PromptPay—all state-built and the sort of thing a Chicago economist would have called “crowding out”—are more advanced than anything the G7’s private banks could have managed. The sovereign-first policy was not a deviation from these countries’ growth, but a deliberate mechanism.
Three Heresies
If the state is back as an allocator of capital, the investor’s job changes, and three heresies follow. First, retire the emerging markets tag. It bundles a semiconductor bet on Taiwan, a policy bet on Beijing and a consumption bet on India and calls it diversification. Allocate by theme, then ask which jurisdiction expresses it most cheaply, along with the most committed sponsor. Sometimes the answer is Riyadh; sometimes it is Ohio.
Second, treat state intent as a cash flow. Orthodoxy priced government involvement as a risk to be compensated. Under sovereign-first regimes, it is often the return: a state that has decided its refinery, its grid or its payment system is a matter of survival will fund it, protect it and overpay for it. Reading strategic intent – the geoeconomist’s craft – is now more useful than a country-risk score.
Third, stop assuming the rich world is the safe leg. The key correlation in the next decade may not be between Brazil and India but between a Gulf fund, an Indian data center and an American export license.
The counterarguments still deserve a hearing as institutions continue to price in: Brazil’s rates and India’s ownership caps are palpable. Custody, tax and liquidity remain stubbornly national, and a fashion for geoeconomics could prove as brief as the trend for BRICS.
For a certain generation, arguing that borders and states mattered to returns might have gotten you a seat at the back of the room. The people who kept saying it – in Brasília, Delhi, Abu Dhabi and Jakarta—turned out to be describing the world the G7 was about to build. Investors who still sort that landscape into a rules-based center and a political periphery are not being prudent. They are being nostalgic.
