oil and gasoline prices. an escalation in geopolitical tensions could contribute to bouts of volatility in commodity prices. so, what does all this mean for financial markets? financial markets may take a while to adjust to this new regime of higher interest rates, and that adjustment may not be smooth. we witnessed last year how such a disorderly adjustment could unfold, when central banks raised interest rates at an unprecedented pace. when interest rates rise rapidly, future cashflows will be discounted at a faster rate than the current cashflows can grow. as a result, most financial assets, which represent a stream of future cashflows, will do badly. last year, the financial markets performed poorly even though there was no economic or financial crisis. global equities and bonds fell by between 16 % and 20 %. a traditional 60 / 40 investor would have lost 18 % in portfolio value in 2022 alone. this is in stark contrast to the preceding 30 years, where such a portfolio would have earned a respectable 8. 7 % per annum. in fact, last year, it did not matter if you were 60 / 40 or any other combination. so long as your portfolio was exposed to global stocks and bonds, the portfolio would likely have performed negatively in 2022. against this backdrop, investors will need to consider building greater resilience in their portfolios. what should be the appropriate composition of the portfolios? how will each asset class perform under different growth and inflation environments? what is the appropriate allocation to inflation - protection assets, such as real assets, inflation - linked bonds, and commodities? what should be the exposure to energy given the opposing pulls of short - term inflation dynamics and longer - term climate risks? is there a role for tail - risk hedges such as gold and how large should that role be? medium term : geoeconomic fragmentation all said and done, inflation will eventually come down and interest rates normalise, though both are likely to be slightly higher than what we have been used to. over the medium term, the key driver of returns and risks in the financial markets will be geoeconomic fragmentation. rising tensions between us and china have led to higher trade barriers, tighter crossborder investment restrictions, and greater domestic production of critical goods deemed to be of strategic importance. on the trade front, slightly more than 60 % of the trade between the two countries is subject to tariffs from one side or the other. investment flows between the us and china

contingent on these uncertain technological developments. a key dimension that asset managers will need to build into their portfolios is climate resilience. they need to ask some searching questions. how will climate change affect the businesses that the portfolio is invested in? which are the firms in the portfolio that have not made credible efforts to decarbonise their operations? what are the investments that run the risk of being stranded assets in a net - zero world? what are the investment opportunities as the world transitions to a low - carbon economy? there have been significant policy moves on the sustainability front that will attract keen investor interest in the years to come. in us, the introduction of the inflation reduction act will direct nearly $ 400 billion in federal funding to incentivise low - carbon investments – in areas such as clean energy generation and storage, electric vehicle manufacturing, and carbon capture. in europe, the repowereu plan will mobilise up to €300 billion of investment in areas such as renewable energy, storage and energy efficiency, to achieve the 2030 target of a renewables share of 45 % in energy production. there are also significant opportunities for sustainable investing in asia. according to mckinsey ’ s estimates, net zero by 2050 would require about us $ 9. 2 trillion of investment per year. out of which, around one - third or us $ 3. 1 trillion would be in the asia pacific. southeast asia has high potential for climate action. estimates from bain shows that five sectors - renewable energy, electric vehicles, forest conservation, built environment and sustainable farming - account for 60 % of southeast asia ’ s carbon abatement potential [ 7 ]. for example, renewables such as solar and wind will reach an annual us $ 30 billion opportunity by 2030, while electric mobility will be an annual us $ 50 billion opportunity by the same period. to meet these needs, we need to catalyse blended financing. many green and transition projects in emerging markets pose risks that are not commensurate with their expected returns. we need catalytic or concessional capital from multilateral banks, public and philanthropic sources to improve project bankability and crowd in private sector capital. we need to strengthen the financial ecosystem to deploy blended finance at scale. this involves looking beyond the financing of individual projects and moving to a portfolio approach whereby concentration risks can be reduced through a diversified pool of assets. for instance, via multi - asset funds which invest in small scale renewable energy projects in specific markets