Navigating Geoeconomic Risk in the U.S. Stock Market

Geoeconomic risk—economically, politically or financially influenced—has become a major concern for those who invest in the U.S. stock market. A recent report uncovers that American equities expose investors to significant geoeconomic risk due to firms' global supply chains. This exposure can impact returns and portfolio allocations.

Investors are compensated for taking on this risk through higher risk premia. However, firms aren't restricted to foreign stock exposure to be vulnerable. U.S. businesses selling to overseas clients or depending on global supply chains can embed foreign risks within domestic stocks. A change in foreign policy can lower the value of U.S. listed companies and spread geoeconomic risk across portfolios.

Geoeconomic shocks can be challenging to diversify away, as they can impact multiple domestic stocks through common foreign exposures. Our study examines this risk through the lens of U.S. export controls issued by the Bureau of Industry and Security. These controls, used frequently in the U.S.-China tech rivalry since 2014, can be seen as indicators of geoeconomic risk for U.S. suppliers of targeted Chinese firms.

By compiling data on Chinese entities added to export control lists and using supply-chain information, we traced geoeconomic risk from those Chinese firms to U.S. investors. We matched affected U.S. suppliers to domestic equity mutual funds, observing investors' reactions to newly targeted Chinese firms. Over 5,000 funds examined between 2010 and 2023 revealed that on average, 20.3% of fund assets are invested in U.S. firms with Chinese customers.

This exposure is particularly high for growth and technology funds, with 43.3% of their portfolios linked to Chinese customers.