Forstrong’s David Kletz outlines where pension capital may flow if global conflict keeps escalating
As geopolitical turmoil continues to shape markets, pension investors are being forced to adjust their portfolio playbook accordingly.
But David Kletz, lead portfolio manager at Forstrong Global Asset Management, warns that complacency remains a dangerous undercurrent across institutional portfolios. He sees a disconnect between the scale of geopolitical turmoil and how markets are responding to it. And despite significant moves in asset prices, global equity markets have not priced in the possibility that current conflicts could escalate further
"I think there's a lot of complacency, numbness, if you will, in this second Trump term to these types of risks," he says. "And that's definitely a danger to markets at present. I don't think you want to take a geopolitical shock and necessarily lift the script on your investment approach and do something drastically different but you do need to be cognizant of the risks and potential ways to hedge around them and to build a more robust portfolio that can withstand some of these growing risks.”
Kletz notably sees energy as the dominant question for investors right now but also draws a distinction between the immediate impact and the risks that could follow. The immediate is rising oil prices across the broader energy complex, while the bigger concern is what happens if those prices stay high for long enough to push inflation up while slowing global growth, creating a stagflation risk that would leave central banks in a bind. Even so, he suggests that remains more of a rising tail risk than the main portfolio call right now.
While he views stagflation as a growing risk, he underscored it’s not yet one that should drive portfolio construction.
On the energy opportunity itself, he breaks it into categories. The first is net energy exporters whose supply routes are not running through conflict zones, pointing to countries like Canada, the US, and Norway. While Middle Eastern producers may be flush with oil, he acknowledged their trade routes and physical infrastructure face direct geopolitical threats. It also helps explain the pressure on markets such as Japan and South Korea, both of which import large amounts of oil and have meaningful exposure to the region.
The second category is oil-importing nations that have built diversified energy grids. China stands out here, having invested heavily in solar and wind to reduce its reliance on crude, a move that also positions it well as power demand from AI and data centres continues to climb. That said, China still imports significant volumes from geopolitically exposed regions, which limits the argument in the near term.
While Kletz admits he doesn’t have hard data on where pension capital is flowing, he acknowledged institutional investors are now stress-testing country exposure through a simple energy lens. Notably, they’re looking at which markets are net exporters or net importers, how dependent they are on oil, and how much of that supply comes from the Middle East.
Meanwhile, Latin America, he suggests, looks somewhat less vulnerable by comparison because even where countries are importers, they generally have lower reliance on Middle Eastern supply.
On China, Kletz suggests the conversation is becoming less binary than it was a few years ago. Canadian pensions, he noted, had previously built meaningful exposure to Asia, including China, before the narrative swung hard toward the idea that Chinese assets were effectively off-limits. That shift made China politically difficult to own and weighed on the case for allocating capital there.
Yet he sees some signs that the backdrop is softening, noting that improving ties between Canada and China could open the door to a more measured discussion among Canadian investors, while recent US actions on trade and foreign policy may have marginally improved China’s standing in relative geopolitical terms.
But he stops well short of saying China has become a clear destination for new capital as he believes the bigger obstacle is growth. China has stabilized somewhat after its property downturn, and its export machine remains strong in areas such as electric vehicles and industrial goods, but domestic demand is still weak and stimulus has not been forceful enough to change the picture.
After all, Kletz underscored how capital doesn’t move on geopolitics alone; it follows the strongest growth stories. Until China can offer a broader and more convincing growth outlook, he suggests it will be hard to justify materially higher allocations, even if sentiment toward the market is becoming less negative.
To that end, he warns that pension investors who simply buy a market-cap-weighted emerging markets index may be taking on more concentrated risk than they realize, noting how South Korea and Taiwan have surged on the back of the chip boom, and together with China and India, they now dominate the MSCI EM index. That concentration matters because the underlying economic drivers across emerging markets vary widely.
“I do think that going a step deeper and looking into some of the other exposures in EM is well warranted. EM gets lumped into this homogeneous concept, but it's a very heterogeneous basket of securities. The risk factors, the economic exposures amongst these nations are quite a lot different,” he said, emphasizing the risk profiles of Latin American nations look nothing like those in Asia, and European EM markets such as Poland operate on an entirely different set of drivers again.
In periods of geopolitical stress, those differences become more pronounced as a conflict centred on energy supply routes will hit oil-dependent Asian importers far harder than commodity-exporting Latin American economies.
"I think pensions would be wise to perhaps not just buy the index, not just buy the beta, if you will, and look a little bit deeper into EM," he added.
Europe also stands out as one of the strongest international opportunities for Forstrong, despite years of false starts since the euro debt crisis. Kletz argues this cycle looks different as the region has largely deleveraged, credit growth is improving, southern Europe is now helping drive growth rather than holding it back, and Germany’s shift toward fiscal stimulus marks a major change.
He also points to stabilizing German manufacturing and stronger orders in industrial economies like Sweden. While investors have already become more constructive on Europe, he believes there could still be more upside if markets can refocus on fundamentals rather than conflict.
“There are other growth stories as well, too, but if you're looking to keep it relatively short and sweet, I think that would be the one. That is certainly the easiest story to tell. It's been the most constructive we've been on the region in at least a decade or two, I would say,” said Kletz.
While he ultimately doesn’t see evidence of sweeping pension portfolio shifts just yet, the bigger change, Kletz underscored that institutional investors are becoming more aware of where their weak spots are and what a worsening conflict could mean for their holdings.
"If this drags on any longer, you may need to be considering making adjustments to your portfolio accordingly," he said.
