Teflon Capitalism: How Investment Funds Absorb the Shock of Geopolitical Risk

Teflon Capitalism: How Investment Funds Absorb the Shock of Geopolitical Risk

Between January 2020 and May 2026, Germany’s DAX index rose by approximately 90%, the S&P 500 by 130% and Japan’s Nikkei by 170%. Those gains came during a period marked by Russia’s invasion of Ukraine, escalating trade disputes and increasingly fragmented international supply chains. Financial markets appeared remarkably resilient to disruptions that were placing considerable pressure on businesses operating across international borders.

Research published by the Asian Development Bank (ADB) in October 2026 offers an explanation for part of this apparent contradiction. Investment funds have been buying shares in companies exposed to geopolitical risk after their valuations decline, providing demand that helps prices recover. Rather than consistently retreating from uncertainty, some professional investors have treated geopolitical disruption as an opportunity to acquire financially sound businesses at lower prices.

The findings have relevance for infrastructure developers, construction equipment manufacturers, engineering businesses and international suppliers whose operations and financing depend on conditions across multiple markets. While the research examines publicly traded equities rather than infrastructure projects directly, it provides insight into how institutional investors distinguish temporary uncertainty from lasting commercial damage.

Briefing

• ADB Economics Working Paper No. 864, published in October 2026, examines how investment funds respond to geopolitical risk.
• The research analyses 5,515 equity funds holding 12,324 securities issued by 12,019 companies.
• The dataset covers January 2011 to March 2025, comprising approximately 24 million fund-stock observations.
• Funds increase exposure to geopolitically vulnerable equities when valuations decline, particularly during severe geopolitical shocks.
• Fund managers’ buying contrasts with withdrawals by ultimate investors, while increased portfolio concentration introduces additional risks.

The Financial Resilience Behind Teflon Capitalism

The study, Teflon Capitalism: Geopolitical Risk and Investment Funds, was written by Daniel Marcel te Kaat of the University of Groningen, Jiancong Liu of the Paris School of Economics and Alexander Raabe of the Asian Development Bank.

The researchers examine why stock markets often recover quickly from geopolitical shocks even when the underlying economic consequences remain substantial. Their analysis identifies a pattern of active investment fund managers increasing their holdings in companies whose share prices have been depressed by geopolitical uncertainty.

When geopolitical tensions intensify, investors may demand greater compensation for holding shares in businesses exposed to disruption. Prices decline, increasing prospective returns for buyers willing to accept the associated risks. Investment funds with sufficient resources and risk tolerance can then acquire those shares at lower valuations, adding demand that helps reverse some of the original price decline.

The researchers describe this apparent resistance to geopolitical shocks as Teflon capitalism, borrowing terminology used in wider economic commentary about the resilience of financial markets. Their findings suggest that active investment funds contribute to that resilience through their portfolio decisions, particularly during periods of unusually severe uncertainty.

The mechanism does not eliminate geopolitical risk. A recovery in market valuations can occur while trade restrictions, supply chain interruptions and other economic consequences remain unresolved. Financial markets may absorb the immediate shock more quickly than the companies operating within them.

What the Investment Data Reveals

The researchers combined monthly investment fund holdings from EPFR Global with company financial information and measures of geopolitical exposure derived from corporate earnings calls.

The resulting dataset contains 5,515 funds investing in 12,324 securities issued by 12,019 companies. Covering January 2011 to March 2025, the analysis includes approximately 24 million observations, allowing the researchers to examine portfolio changes during different geopolitical conditions.

Company exposure was measured using references to geopolitical issues in earnings call transcripts, including military conflicts, threats of war, military buildups and other developments that could affect business operations. These measures were compared with changes in fund holdings, with adjustments for share-price movements to distinguish active investment decisions from changes in portfolio values caused by market fluctuations.

In the researchers’ estimates, a two-standard-deviation increase in geopolitical risk was associated with funds raising their valuation-adjusted allocation to more exposed companies by three basis points. That represented approximately 20% of the median portfolio share, a substantial relative adjustment within an individual fund’s holdings.

The response was particularly pronounced during extreme geopolitical events, including the period following Russia’s invasion of Ukraine in 2022.

The results were not explained by investment in defence manufacturers or companies producing dual-use goods, sectors that might be expected to attract additional demand during military conflicts. Nor were they driven by a particular country, major fund domicile or group of large asset managers. The relationship between geopolitical exposure and subsequent fund purchases persisted across numerous statistical checks.

The analysis also accounted for company characteristics and other sources of economic uncertainty. This helped distinguish purchases associated with geopolitical exposure from broader movements between industries, countries or investment strategies.

Why Fund Managers Buy While Investors Withdraw

The study identifies considerable differences between investment funds in their willingness to acquire geopolitically exposed assets.

Funds with greater capacity to absorb risk, including those with larger asset bases, higher cash reserves or stronger preceding investor inflows, were more inclined to increase their exposure during periods of geopolitical uncertainty. Funds with weaker previous performance also displayed a greater tendency to pursue these opportunities.

The researchers interpret this behaviour as consistent with a search for yield, where managers seek higher prospective returns by accepting risks that other investors are reluctant to hold. Their willingness to purchase affected securities can help absorb selling pressure, although it also changes the composition of their portfolios.

Funds increasing their exposure to geopolitically vulnerable companies tended to develop more concentrated holdings, investing in fewer individual equities across fewer industries and countries. At the same time, the researchers found evidence of increased cash holdings, providing a degree of protection against potential losses or further market volatility.

Greater concentration can leave funds more sensitive to developments affecting particular businesses, sectors or geographic markets. Additional liquidity may help manage those risks, but it cannot eliminate the possibility of more permanent financial losses.

The behaviour of the investors supplying capital to these funds provides a revealing contrast. While professional fund managers increased holdings in geopolitically exposed equities following adverse shocks, ultimate investors tended to withdraw money from funds with greater exposure to those risks.

The researchers associate this behaviour with the tendency of investors to sell during periods of market stress, potentially crystallising losses rather than remaining invested through a subsequent recovery.

The opposing responses create a tension within institutional investment. Fund managers may identify attractive long-term opportunities in falling valuations, but withdrawals by their clients can constrain the capital available to pursue them. Sustained outflows could eventually force managers to reduce positions they would otherwise prefer to retain.

Previous research has documented how investment funds can amplify financial instability by accelerating capital outflows during crises. The ADB paper identifies circumstances in which fund managers instead act as buyers, absorbing selling pressure and helping stabilise valuations. Both behaviours can exist within the same investment system, depending on the nature of the shock and the investors involved.

Infrastructure Investment and Geopolitical Exposure

Construction and infrastructure businesses operate in markets where geopolitical disruption can affect production costs, financing conditions and commercial demand simultaneously.

Construction equipment manufacturers may carry substantial inventories, maintain international dealer networks and depend on components sourced from several countries. Trade restrictions, shipping disruption or changes in energy prices can increase operating costs or weaken demand without necessarily undermining a manufacturer’s long-term competitive position.

For an investment fund assessing such a business, the distinction between a temporary earnings disruption and permanent deterioration in its prospects becomes central to the valuation decision. A financially healthy manufacturer whose shares have fallen because of wider geopolitical uncertainty may present a different investment proposition from a business facing structural losses or the permanent closure of an important export market.

Listed infrastructure operators have different characteristics. Businesses with regulated or contracted revenues may offer greater visibility over future income, although they can still face political intervention, financing pressures and changes in operating costs. Equipment manufacturers and engineering suppliers are often more directly exposed to fluctuations in capital expenditure and industrial demand.

The ADB findings suggest that some investment funds are willing to distinguish between the market’s immediate response to uncertainty and a company’s longer-term commercial prospects. That approach could be relevant to listed engineering groups, construction materials suppliers, equipment manufacturers and infrastructure operators whose shares are held by institutional investors.

Large infrastructure programmes introduce additional considerations. Their financing frequently depends on long investment horizons, substantial upfront expenditure and confidence in future revenue or public funding. Geopolitical disruption can influence these conditions through changing trade policies, higher material costs, restrictions on technology transfers and interruptions to international supply chains.

The research does not directly establish how private infrastructure funds or project lenders respond to such shocks. Nor does buying shares in an existing listed company necessarily provide new capital for construction projects. Secondary-market transactions transfer ownership between investors, with any influence on corporate financing occurring more indirectly through market confidence, valuations and the conditions under which companies can raise additional capital.

A recovery in a listed company’s share price may therefore improve the financial environment surrounding a business without resolving the operational difficulties affecting its projects, factories or supply networks.

Financial Stability and the Wider Economy

Stock market valuations represent expectations about future corporate earnings, adjusted for risk and the returns investors require. They do not provide a complete measure of business investment, employment, trade flows or productive capacity.

Geopolitical fragmentation can suppress economic activity even when equity markets recover. Companies may postpone capital expenditure, reorganise production networks or reduce their exposure to particular countries while their shares continue to attract investors seeking higher prospective returns.

For infrastructure and industrial businesses, these adjustments can be expensive and prolonged. Moving component production, developing alternative suppliers or establishing new distribution networks may require years of investment. Financial markets can reprice the associated risks considerably faster.

The geographical distribution of investment flows adds another dimension. Countries containing large numbers of geopolitically exposed companies could attract additional portfolio investment when funds purchase those businesses at reduced valuations. Other markets might experience corresponding reductions in allocations.

The ADB researchers identify these potential cross-border effects as an area requiring further investigation rather than presenting them as established outcomes. The ultimate direction of capital flows would also depend on withdrawals from investment funds and the distribution of exposed companies between countries.

Another unresolved question concerns the investors selling securities that investment funds acquire during geopolitical shocks. Identifying those sellers would help establish whether the stabilising purchases observed in the research are sufficient to offset other pressures during more prolonged crises.

The findings nevertheless add an important dimension to the relationship between geopolitical uncertainty and financial stability. Investment funds can transmit shocks through capital withdrawals and portfolio adjustments, but some managers also provide demand when other market participants are reducing their exposure.

The Limits of Market Resilience

The ADB research offers evidence that investment funds can provide a stabilising influence during periods of geopolitical stress. Its conclusions draw on detailed portfolio data, company-level exposure measures and statistical tests designed to distinguish active buying from changes caused by share-price movements.

There are important boundaries to the findings. The study focuses primarily on actively managed equity funds and covers investment behaviour through March 2025. It does not establish how investors responded to every subsequent geopolitical development, nor does it demonstrate that similar mechanisms operate in private infrastructure funds, construction project financing or other less liquid investment markets.

The paper is also part of the ADB Economics Working Paper Series, which presents research in progress for discussion and debate. Its conclusions are those of the authors rather than an official policy position of the Asian Development Bank.

The findings help explain how equity markets can absorb geopolitical shocks without the same degree of disruption remaining visible in headline valuations. Investment funds may support the share prices of exposed businesses, even as those companies continue to contend with interrupted supply chains, higher costs and uncertain trading conditions.

The financial recovery can arrive considerably sooner than the operational one.

Key Industry Questions

1. What is Teflon capitalism? Teflon capitalism describes the apparent resilience of financial markets during periods of substantial geopolitical or economic uncertainty. The ADB study examines how investment fund purchases contribute to that resilience.
2. Why do investment funds buy shares during geopolitical crises? Some funds seek to purchase financially sound companies after geopolitical uncertainty has reduced their share prices, increasing prospective returns.
3. How large was the ADB research dataset? The final analysis covered 5,515 investment funds, 12,324 securities and 12,019 companies between January 2011 and March 2025.
4. Do all investment funds increase their exposure to geopolitical risk? No. The research identifies stronger buying responses among funds with greater risk-taking capacity and those with weaker previous performance.
5. Does geopolitical risk always reduce company valuations? No. The effects depend on individual companies and circumstances. The research identifies a tendency for more exposed companies to experience greater valuation pressure during geopolitical shocks.
6. How does geopolitical instability affect infrastructure financing? It can influence investor confidence, financing costs, supply chains and expected project returns. The ADB paper specifically examines publicly traded equities rather than infrastructure project financing.
7. Are investment funds and their investors responding in the same way? No. The researchers found that fund managers increased holdings in exposed equities while ultimate investors tended to withdraw from more exposed funds.
8. Does stock market recovery indicate that geopolitical damage has been reversed? Not necessarily. Share prices can recover while businesses continue to experience disrupted trade, higher operating costs or reduced investment activity.
9. Can this research be applied directly to private infrastructure funds? No. The study examines equity fund holdings and does not directly establish comparable behaviour in private infrastructure investment vehicles.

Strategic Takeaways

1. Market valuations and operational performance can diverge. A recovery in share prices does not necessarily indicate that geopolitical disruption has ceased affecting industrial businesses.
2. Investor capacity influences market resilience. Funds with greater resources and liquidity appear better positioned to acquire assets during periods of uncertainty.
3. Portfolio concentration creates additional exposure. Buying geopolitically affected securities may improve prospective returns while increasing dependence on fewer investments.
4. Capital providers can respond differently to the same shock. Fund managers may seek opportunities while their investors withdraw money, potentially constraining future purchases.
5. Infrastructure financing requires separate assessment. Evidence of resilience in publicly traded equities cannot automatically be extended to private projects, long-term construction financing or illiquid infrastructure assets.