Geopolitical instability and elections have strategists wary of 2024

Geopolitical risks will be the main threat to the economic outlook for 2024, as major wars join several crucial elections across major world powers.

As the world’s financial institutions map out the investment landscape for the coming year, they expect a worsening geopolitical backdrop and greater divergence across key regions , adding to the uncertainty and volatility of the market.

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 major threat to the global economy over the next two years.

However, concerns about relations between China and Taiwan and Russia and NATO were similar, and geopolitical tensions were the top business concern in both the short and medium term, with 62% of businesses citing geopolitics as a major threat to the global economy.

“Deglobalization and ever-higher oil prices, which may be caused by intensifying geopolitical tensions, are also 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 gap between regions – stronger growth is expected in the US and major markets emerging markets, while China and the eurozone are expected to struggle.

In its investment outlook for 2024 released on Monday, Goldman Sachs fund management he noted that elections in the US, UK, South Africa, India, Taiwan and Russia will add to the range of opportunities for the global economy to deviate from its current trajectory.

The asset management arm of the Wall Street giant noted that concerns about the sustainability of government debt and the fiscal path in the US could increase ahead of the presidential election next November, while domestic socio-economic risks – such as strikes in some industries among high stubborn. inflation – could continue to weigh on major economies and put more pressure on growth.

“An increase in geopolitical tensions could trigger more trade restrictions around the world, leading to further economic disruption. We expect economies to continue investing heavily in their economic security over the next 12 months and beyond,” GSAM strategists wrote.

“This could be driven by developed ‘replenishment’ markets and critical ‘supporting friends’ supply chains that remain highly interdependent and, in some cases, over-focused, such as advanced semiconductors.”

Russia-Ukraine, Israel-Hamas, China-Taiwan

The view was taken by Roland Temple, chief market strategist at Lazard, who said in a global outlook report last week that although he predicts one geopolitical crisis is very difficult, it is what is clear is that “the global path goes more often. conflict over an ever-increasing outcome.”

“Navigating the changing geopolitical landscape is likely to require access to deep sources of knowledge – at perilous times, as potentially overlooked geopolitical issues in the past is now directly impacting supply chains and companies’ customer bases,” said Temple.

“Conflicts and ongoing geopolitical tensions are likely to dampen growth further, while adding to inflationary pressures that are beyond the control of central banks.”

Temple predicted that the conflict between Russia and Ukraine will extend well into 2024, as the Ukrainian resistance loses momentum due to the passing winter , while concerns are growing about the reliability of Western funding and military support.

“Although a negotiated settlement appears to be the only way to end the war, both sides are still far from agreeing to agree on their grand designs – namely, to control Russia to hold all of Ukraine and to control all of Ukraine. area,” he said.

As for the Middle East, the “most combustible situation” would be the result of the Israel-Hamas conflict into neighboring states, including Iran, which could “enter into A regional conflict with global and military implications.” The main threat of this kind of escalation is the disruption of the movement of energy supplies through the Strait of Hormuz, through which about 20% of the world’s oil supply is shipped. .

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 viable geopolitical scenario is multiple tensions. -China’s confrontation with the West over competition and Taiwan.

“Taiwan’s elections in early 2024 will set the stage for the rest of the year. The Democratic Progressive Party (DPP) is currently far ahead of the more Beijing-friendly Kuomintang (KMT),” he said.

“The DPP victory could increase tensions with Beijing because the DPP is considered to be in favor of a formal declaration of independence, a red line for the Chinese government. “

A clear result of both direct business competition between China and the US and concerns about China’s intentions in Taiwan are increasing supply chain disruptions, as trade tariffs and barriers join post-Covid supply concerns on developed economies to follow “buddy-shoring” or “near-shoring” policies.

“These plans are becoming more difficult than policymakers may have anticipated, given the inertia around supply chains and the challenge of cultivating the necessary skills among workers in new areas ,” Temple said.

“However, geopolitical tensions are contributing to economic disruptions that could, at least in the short term, dampen global growth and add to inflationary forces.”

On a positive note, Temple suggested that persistent disinflation should allow the US Federal Reserve and other central banks to consider cutting interest rates as early as the second quarter, which should “relieve headwinds to growth and stimulate capital expenditures in anticipation of a cyclical economic rebound. .”

Security and semiconductors

GSAM Head of Funds & Wealth Management Marc Nachmann and his team expect critical mineral supply chains to gain attention due to their importance in the clean energy transition, along with their potential exposure to shocks to give

As a result, GSAM recommended that investors should avoid trying to time the market or make calls on bold political or geopolitical outcomes, but instead approach take a proactive approach to asset allocation based on “extensive bottom-up research.”

“We believe that companies that successfully align with corporate and government efforts to enhance the security of supply chains and facilities as well as national security will emerge as long-term winners,” the strategists said, adding that companies with pricing power, sustainable business models and strong balance sheets should be the focus.

“The public equity market could provide opportunities to acquire targeted exposure to more established companies that produce semiconductors and semiconductor manufacturing equipment, as well as industrial automation and technology companies that facilitate refinancing manufacturing “

Demand for natural gas products is likely to increase, as countries seek affordable, reliable and sustainable energy, GSAM predicts, while security threats are growing and more complex. – complex creating opportunities for cybersecurity platforms and aerospace and defense technology providers.