Geopolitics
US financial instability reinforces our bearish investment outlook by weighing on economic growth and corporate earnings while also increasing US policy uncertainty and geopolitical risk.
The Russia-Ukraine war has prompted Europe to ramp up its defense spending. This will greatly benefit its defense industry, especially if defense coordination across the EU increases.
China’s victory in getting KSA and Iran to restore diplomatic relations is of far greater consequence to commodity markets than the past weeks’ bank failures in the US. For China, further success in sorting long-standing security issues in the Middle East could incentivize oil and gas capex and affect oil flows. With short- to medium-term fundamentals largely unchanged, we are keeping our 2023 and 2024 Brent forecasts similar to last month, at $95/bbl and $110/bbl, respectively.
Generative AI is a major technological breakthrough that holds tremendous economic and investment promise and will have sweeping effects on wide swaths of the economy. We are bullish on generative AI as a long-term investment theme. However, at the moment we observe hallmarks of an investment frenzy. We believe that there will be a more attractive entry point for patient investors.
Investors in Europe and the American West are already starting to think about the implications of the 2024 election, given that sticky inflation and tighter monetary policy keep the risk of recession elevated.
The first legislative meeting of Xi Jinping’s third term suggests that Chinese policy is continuous and consistent with the previous ten years, which is negative for long-term productivity.
The development of trading blocs and the rise of economic warfare will lead to the inefficient allocation of resources. Higher fiscal outlays and tight commodity supplies will feed into energy prices driving headline inflation. It also will drive demand for inventories as hedges against supply volatility globally higher. We remain long equity exposure via ETFs to oil and gas producers, and metals miners. We also retain our exposure to commodities via the COMT ETF.
US domestic politics, hypo-globalization, and Great Power Competition favor a revival of US manufacturing capacity. The industrial sector will benefit from the attempt to rebuild US manufacturing. Go long physical infrastructure and defense stocks. Find opportunities to take a long position on the universe versus the metaverse.
Investors should avoid / stay underweight Turkish stocks and local currency bonds versus their respective EM benchmarks. Stay underweight Turkish sovereign credit.
Great Power Rivalry is taking another leg up as Russia and China further align their geopolitical interests. Investors should stay long USD-CNY, favor defensives over cyclicals, and markets like North America and DM Europe that have less exposure to geopolitical risk.