- Geopolitical Strategist
Iceland, Institutional
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For investors, there is no bigger geopolitical issue, in my view, than the US/China relationship. US/China relations will likely remain in structural decline for years to come, shaping policy, trade, and the macroeconomic background, and ultimately, creating a new, more fragmented, and more fractious international order.
Interpreting the investment implications of this new global order will take time, but I think some of the contours of this new world are starting to take shape, leading to a set of new investment areas to explore.
How is the new world order starting to take shape?
Great-power competition is already emerging as a US policy framework and will likely continue to be a focus for decades — regardless of which political party controls the White House and Congress in the future. Other powers, notably Japan, India, South Korea, the European Union, and the UK are also increasingly looking to adjust their strategic stance for a more hostile international environment.
Russia’s invasion of Ukraine has accelerated this great-power environment, strengthening the US’s relationship with a number of allies across Europe and the Indo-Pacific. I believe it is only the first chapter in a series of coming territorial disputes and potential military crises — with the most notable flashpoints likely to be Taiwan, the South China and East China seas, North Korea, and Iran. Investors will need to be ready to navigate the fallout of these crises as well as the shifting policy backdrops that result from increasing geopolitical competition.
In this accelerating great-power environment, US/China relations will likely worsen in the coming years. Ongoing geopolitical instability — including recent and dramatic events in Russia — will lead policymakers to place a higher priority on national security, often at the expense of economic efficiency. However, policymakers are now increasingly focused on “strategic” industries — such as semiconductor technologies, critical minerals, space and aerospace technologies, biotech and pharma, and artificial intelligence. These industries should see more policy protection, but investors should expect supply-chain disruptions across a number of sectors in the future.
In this emerging great-power world, geopolitical and policy risk remain elevated, including the probability of great-power military conflict that — while not currently my base case — nevertheless sits at its highest probability level in decades.
What are the key implications for investors?
At a macroeconomic level, this “resiliency over efficiency” policymaker orientation is also likely to contribute to structurally higher inflation, more extreme and more differentiated cycles, and lower global growth over time.
Deepening climate stresses and related cascading national security impacts will further exacerbate this growing great-power rivalry, while creating new geopolitical and policy frictions globally, particularly in equatorial and tropical regions. Great-power competition could also make collective action on climate change more difficult to achieve, particularly among the world’s largest carbon emitters (China, the US, India, Russia). This further accentuates the need for substantial and sustained global investment in both climate resiliency and energy transition strategies.
Beyond those broad macro implications how does this new international world order permeate the investable universe of both public and private companies and issuers? I see four areas that are intimately linked to this great-power rivalry.
Legacy defense
As geopolitical tensions widen, I expect to see spending on defense accelerate globally, producing a long-term demand tailwind across what I refer to as “legacy defense” companies — those that are critical to weapons design and manufacturing, particularly those that focus on rocket and missile development. This will be compounded as global security alliances deepen in the coming months and years.
Defense innovation
As governments seek to bolster national security, they will continue to invest in emerging technology, and modern defense arsenals increasingly rely on dual-use civilian/military companies for semiconductor technologies, cyber defense and security, and cellular and communications infrastructure. I expect companies in this sector to benefit from a long-term demand tailwind from governments around the world.
Climate adaptation and resiliency
In a world of great-power competition, climate adaptation and resiliency becomes even more critical — with its potential to compound geopolitical tensions through increased climate migration, resource conflicts, food and water scarcity, and other national security challenges. Within the great-power competition framework, investment in climate adaptation and resiliency is viewed as an “insurance policy”; if higher-risk areas can be made more resilient, defense planners can focus less of their resources on climate-driven humanitarian disasters and related military operations — and focus instead on core national security objectives.
Critical minerals
Critical minerals, such as nickel, cobalt, and aluminum, are those deemed to be of strategic importance to a range of industries, especially those involved in the transition to clean energy. The US, China, and Russia are already competing for access to these minerals across Latin America, Africa, and around the world — competition will only accelerate. Companies with exposure to critical minerals mining, especially those headquartered in countries friendly to US great-power goals, are likely to benefit.
More broadly, intensifying competition and friction between great powers, most notably the US and China, will impact any company that operates in a sector that is deemed strategic and that list is likely to grow over time, but for now, I think the above areas are the ones investors should monitor more closely. In close collaboration with macro-strategist and investor colleagues, I will continue to deepen my research into the potential investment implications, including how to construct an investable universe that is aligned to this strategic geopolitical shift.
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Monthly Market Review — August 2024
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Brett Hinds
Jameson Dunn