War/Conflict
Global instability will continue in 2024 – whatever happens afterward. Slowing economies will exacerbate already high geopolitical risk and policy uncertainty stemming from the US election and foreign challenges to US leadership. Overweight government bonds, defensive sectors, the Americas versus other regions, aerospace/defense stocks, and cyber-security stocks.
A series of notable events took place over the Thanksgiving holiday but none of them force us to change our fundamental assessments. The conflict in the Middle East is likely to escalate rather than de-escalate, while the Taiwan Strait has at least a 50/50 chance of seeing tensions escalate next year.
Investors should not get their hopes up about the Biden-Xi summit. Wait to see if a new ruling party is elected in Taiwan before downgrading geopolitical risk in the Taiwan Strait. US-China strategic détente is possible but neither the geopolitics nor the macro backdrop warrant a risk-on position next year.
Amid a range of geopolitical narratives, what matters is that the US strategy of economic engagement with its rivals is failing, giving rise to a new strategy of containment that will reinforce the secular rise in geopolitical risk. Our market-based quantitative indicators of geopolitical risk are set to rise in the coming year.
Results from Tuesday’s elections suggest that the Democrats are doing better than what their 2024 polling are showing. While the results are marginally positive for equities, investors should not overrate this off-year election, especially considering the slowing economy and the many foreign challenges facing the US.
Investors should reduce risk, increase allocation to safe havens, and brace for oil price volatility and supply disruptions stemming from the Middle East over the next zero-to-12 months.
Stronger US growth elicits a response from the House Republicans. But a government shutdown is not devastating to the economy. What is more devastating would be a crisis in the Middle East, Europe, and Asia. Stay long US defense, energy, and large caps stocks.
