Israeli soldiers transport Palestinian prisoners out of the Gaza Strip on November 20, 2023, as fighting between Israel and the Hamas movement continues.
Gil Cohen-magen | AFP | Getty Images
Geopolitical risks will be the key threat to the economic outlook for 2024, as large-scale wars converge with a host of key global power elections.
As the world’s financial institutions map out the investment landscape for the coming year, they expect an increasingly fraught geopolitical landscape and greater divergence in key regions, exacerbating uncertainty and market volatility.
In a global risk survey of 130 businesses last month by Oxford Economics, nearly two-fifths of respondents saw the Israel-Hamas war as a very important risk to the global economy over the next two years.
However, concerns about relations between China and Taiwan and Russia and NATO were equally widespread, and geopolitical tensions were the top concern for businesses in both the short and medium term, with 62% of businesses citing geopolitics as a very important risk to the global economy.
“Deglobalization and persistently higher oil prices, both of which could be triggered by escalating geopolitical tensions, are also quite prominent in the latest survey,” Oxford Economics researchers said.
The International Monetary Fund expects global growth to slow to 2.9% in 2024, amid a widening divergence between regions — stronger growth is forecast in the US and major emerging markets, while China and the euro zone are expected to struggle.
In the 2024 investment outlook published on Monday, Goldman Sachs Asset Management He noted that elections in the US, UK, South Africa, India, Taiwan and Russia will add to the range of possibilities for the global economy to deviate from its current path.
The Wall Street giant’s asset management arm noted that concerns about the sustainability of government debt and the fiscal trajectory in the US could increase ahead of next November’s presidential election, while domestic socio-economic risks — such as strikes in some industries in through stubbornly high inflation — could persist in all major economies and further affect growth.
“Rising geopolitical tensions could cause more trade restrictions around the world, resulting in further economic fragmentation. We expect economies to continue to invest significantly in their financial security over the next 12 months and beyond,” GSAM strategists wrote.
“This may be due to critical ‘re-support’ and ‘support-friend’ supply chains of developed markets that remain highly interdependent and, in some cases, hyper-concentrated, such as edge semiconductors.”
Russia-Ukraine, Israel-Hamas, China-Taiwan
The view was echoed by Roland Temple, chief market strategist at Lazard, who told a global outlook report last week that while predicting the path of any geopolitical crisis is fraught, what is clear is that “the global trajectory is towards more frequent conflicts of increasing consequence’.
“Navigating the evolving — at times treacherous — geopolitical landscape will likely require access to deep wells of expertise, as geopolitical issues that might have been overlooked in the past directly affect companies’ supply chains and customer bases,” Temple said.
“Ongoing geopolitical conflicts and tensions are likely to dampen growth further, while intensifying inflationary pressures that are beyond the control of central banks.”
Temple predicted that the Russia-Ukraine conflict will extend into 2024 as the Ukrainian counteroffensive loses momentum due to the winter and concerns over the reliability of Western funding and military aid intensify.
“While a negotiated settlement is likely the only way to end the war, both sides remain a long way from agreeing to capitulate to their grandiose plans — that is, for Russia to control all of Ukraine and Ukraine to control all its sovereignty. ground,” he said.
As for the Middle East, the most “inflammable situation” would be the spillover of the Israel-Hamas conflict to neighboring states, including Iran, which could “evolve into a regional conflict with global and military implications.” The primary risk of this form of escalation would be the disruption of energy supply transit through the Strait of Hormuz, through which about 20% of the world’s oil supply is transported.
But Temple argued that all parties, including Iran, Israel and the United States, have strong incentives to avoid this outcome, and that the most economically important geopolitical situation is China’s multifaceted tensions with the West over competition and Taiwan.
“Elections in early 2024 in Taiwan will set the scene for the rest of the year. The Democratic Progressive Party (DPP) is currently well ahead of the more Beijing-friendly Kuomintang (KMT),” he noted.
“A DPP victory will likely escalate tension with Beijing, as the DPP is seen as favoring a formal declaration of independence, a red line for the Chinese government.”
A clear result of both direct industrial competition between China and the US and concerns about China’s intentions in Taiwan is the increasing fragmentation of the supply chain, as trade tariffs and barriers along with post-Covid logistics concerns have driven developed economies to pursue “crony support” or “near shore” policies.
“These plans are proving more difficult than policymakers might have envisioned, given the inertia around supply chains and the challenge of cultivating the necessary skills among workers in new locations,” Temple said.
“Nevertheless, geopolitical tension is contributing to economic fragmentation that, at least in the short term, may limit global growth and contribute to inflationary forces.”
On a positive note, Temple suggested that continued deflation should allow the Federal Reserve and other central banks to consider cutting interest rates as early as the second quarter, which would “mitigate headwinds to growth and stimulate capital spending in anticipation of a cyclical economic recovery.”
Security and Semiconductors
GSAM Head of Asset & Wealth Management Marc Nachmann and his team expect critical minerals supply chains to gain attention due to their growing importance in the clean energy transition, along with their potential vulnerability to supply shocks.
As a result, GSAM suggested that investors avoid trying to time the market or make calls on binary political or geopolitical outcomes, but instead take a proactive approach to asset allocation based on “extensive bottom-up research ».
“We believe companies that successfully align with corporate and government efforts to strengthen supply chain and resource security as well as national security will emerge as long-term winners,” the analysts said, adding that companies with pricing power, resilient business models and strong balance sheets should be the focus.
“The public stock market may present opportunities for targeted exposure to more established companies that produce semiconductors and semiconductor manufacturing equipment, as well as industrial automation and technology companies that facilitate manufacturing renewal.”
Demand for natural gas products is likely to increase as nations seek affordable, reliable and sustainable energy, GSAM predicted, while growing and more complex security threats create opportunities for cybersecurity platforms and aerospace and defense technology providers.
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