by Kim Catechis, Investment Strategist, Franklin Templeton Institute, & Karolina Kosinska, CIPM, Analyst, Franklin Templeton Institute
Introduction
Deep water waves originate in depths of around 200 metres or more.1 They start out wide and accelerate rapidly, twisting and changing as they brush the contours of the seabed. They become intertwined with others and form bigger waves. The slope and the features of the seabed can either calm or exaggerate the force, current and speed of deep water waves. The extent of their power is hard to see from the surface, and we can easily misunderstand the potential impacts.
That is a striking parallel with the long-term drivers that face investors. We typically react to the impacts we can foresee on the surface, with the logical misattribution of the drivers beneath. Powerful ‘waves’ are sweeping away established assumptions before them, fundamentally altering the economic, political and public policy foundations for asset prices. Meanwhile, the struggle between supply-side and demand-side economics is changing, with a direct impact on the outlook for many countries. The relationship of these factors is one of interdependence, not dependence.
In our original Deep Water Waves publication, we identified several powerful, connected and long-duration factors that will have a significant impact on investment returns over the next decades. This new paper explores the interplay between them and updates on their likely impact on investment outcomes in the next decade.
What has changed overall?
The underlying ‘waves’ are the same, but accelerating, growing and strengthening. The big takeaways are:
- Economic logic is no longer the main driver. All around the world, geoeconomic logic prevails. That means that investors need to consider new, tough-to-quantify concepts in their valuation criteria: The weaponisation of energy supply, security relationships, supply chains and trading relationships, access to financial systems, even the pricing of commodities, through a new lens.
- Globalisation in all dimensions (trade, labour, capital flows) is now even more in jeopardy. Therefore, for a significant period (at least the remainder of this decade), global growth will be weaker than previously expected. That matters for real interest rates, debt levels and equilibrium equity valuations.
- The conversion of Europe is real. Germany’s Zeitenwende (turning point) could radically change the trajectory of government debt issuance, the global competition for capital and real exchange rates.
Conclusion
Deep water waves are in constant motion and have created new patterns and crosscurrents, resulting in the dominance of geopolitical considerations. Investors must recognise that they are now operating in an environment where geoeconomic logic has superseded traditional economic logic. This means there are non-economic priorities that take precedence over the concept of economic efficiency and naturally the valuation tools we have used for the last 50 years or so are no longer sufficient. There needs to be an acceptance that policy direction will inevitably be interventionist, and this will call for a deeper knowledge of structural strengths and vulnerabilities of investee countries.
The United States, European Union (EU) and China are the main global economic powers, representing 26%, 17% and 16% of the world economy.2 Each works to protect its economic interests: The United States is less reliant on trade but is a top importer, China leads in exports and needs foreign markets, and the EU is the largest consumer market, setting many global standards while depending heavily on intra-bloc trade. Increasing interventionist policies make investing more complex. Asset allocation strategies may need to adapt by redefining quality (e.g., including ESG factors), seeking income and diversification globally and using alternative assets. New incentives around retirement savings and health care have become essential, in view of the future liabilities generated by ageing populations.
Economic polarisation between nations and regions will increase. Many middle- and low-income countries will face declining foreign direct investment, rising unemployment from supply-chain shifts and automation and trade barriers that limit access to major markets. Educational shortcomings further hinder economic adaptation, highlighting opportunities for investment in education, online services and broadband infrastructure. Local governments, often lacking funds and expertise, will likely need to partner with entities like the IFC and World Bank. China continues to exert influence through vaccine and infrastructure diplomacy, especially in technology and communications. For many countries, this is beneficial. Domestically, governments are incentivising investment in disadvantaged regions and directing credit decisions, meaning investors should recognise that political motives may outweigh traditional return criteria.
In a multi-polar world, scale is a strategic advantage. Economic heft and societal resilience are now core elements of national security, shaping a country’s capacity to withstand external shocks and geopolitical stress. As a result, the strategic value of membership in trade, economic, and defence alliances such as the economic and defence alliances, such as the EU, CPTPP or ASEAN, has risen markedly.
For institutional investors, this evolving landscape calls for a reassessment of established approaches to country risk. Traditional models that emphasise fiscal or monetary stability alone may no longer capture the full spectrum of resilience. Integrating geopolitical alignment and collective security networks into risk-premium calculations could offer a more accurate reflection of long-term investment risk and opportunity.
Endnotes
- Source: “What is the deep ocean?” US National Oceanic and Atmospheric Administration. oceantoday.noaa.gov (undated).
- Source: World Bank. Data as of end 2024, accessed July 3, 2025.
Kim Catechis and the Franklin Templeton Institute develop thought leadership and research for educational purposes only. Franklin Templeton Institute does not provide investment advisory services or manage money for Franklin Templeton or any of its clients. Companies referenced in this paper are mentioned for illustrative use and should not be viewed as investment recommendations or as an indication of any trading intent of Franklin Templeton.
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WHAT ARE THE RISKS?
All investments involve risks, including possible loss of principal.
Equity securities are subject to price fluctuation and possible loss of principal.
International investments are subject to special risks, including currency fluctuations and social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets.
The government’s participation in the economy is still high and, therefore, investments in China will be subject to larger regulatory risk levels compared to many other countries.
There are special risks associated with investments in China, Hong Kong and Taiwan, including less liquidity, expropriation, confiscatory taxation, international trade tensions, nationalization, and exchange control regulations and rapid inflation, all of which can negatively impact the fund. Investments in Hong Kong and Taiwan could be adversely affected by its political and economic relationship with China.
An investment in private securities (such as private equity or private credit) or vehicles which invest in them, should be viewed as illiquid and may require a long-term commitment with no certainty of return. The value of and return on such investments will vary due to, among other things, changes in market rates of interest, general economic conditions, economic conditions in particular industries, the condition of financial markets and the financial condition of the issuers of the investments. There also can be no assurance that companies will list their securities on a securities exchange, as such, the lack of an established, liquid secondary market for some investments may have an adverse effect on the market value of those investments and on an investor’s ability to dispose of them at a favourable time or price.
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