Geopolitical instability and a crowded electoral calendar have strategists wary of 2024

Geopolitical risks will be the main threat to economic prospects in 2024, as large-scale wars converge and a slew of pivotal elections across major global powers converge.

As global financial institutions chart the investment landscape for the coming year, they anticipate an increasingly charged geopolitical backdrop and greater divergence between key regions, exacerbating uncertainty and market volatility.

In a global risk study conducted by Oxford Economics on 130 companies last month, nearly two-fifths of respondents saw the war between Israel and Hamas as a major risk to the global economy over the next two years.

However, concerns about relations between China, Taiwan, Russia and NATO were similarly widespread, and geopolitical tensions were the top business concern in the near to medium term, with 62% of businesses citing geopolitics as a very high risk to the economy. Global.

“The decline in globalization and the continued rise in oil prices, both of which could result from intensifying geopolitical tensions, are fairly prominent in the latest survey,” researchers at Oxford Economics said.

The International Monetary Fund expects global growth to slow to 2.9% in 2024, amid widening disparities between regions – stronger growth is expected in the United States and large emerging markets, while China and the eurozone are expected to face difficulties.

In its investment forecasts for 2024 published on Monday, Goldman Sachs Asset Management He pointed out that elections in the United States, the United Kingdom, South Africa, India, Taiwan and Russia will add to the range of possibilities for the global economy to deviate from its current path.

The giant Wall Street asset management arm has indicated that concerns about government debt sustainability and the fiscal trajectory in the United States may escalate in the run-up to the presidential election next November, while domestic social and economic risks – such as strikes in some industries amid rising prices… Stubborn inflation – could persist in major economies and further impact growth.

“Increasing geopolitical tensions could lead to further trade restrictions around the world, leading to further economic fragmentation. We expect economies to continue to invest heavily in their economic security over the next 12 months and beyond,” GSAM strategists wrote.

“This may be driven by a reshoring of developed markets and critical supply chains that remain highly interconnected and, in some cases, highly concentrated, such as leading semiconductors.”

Russia-Ukraine, Israel-Hamas, China-Taiwan

This view was echoed by Roland Temple, chief market strategist at Lazard, who said in last week’s Global Outlook that while predicting the course of any single geopolitical crisis is risky, what is clear is that “the global trajectory is heading toward a more… Of repetition. Conflicts with increasing consequences.”

“Navigating the evolving – at times treacherous – geopolitical landscape will likely require access to deep wells of experience, as geopolitical issues that might have been ignored in the past now directly impact companies’ supply chains and customer bases,” Temple said.

“Persistent geopolitical conflicts and tensions are likely to further depress growth, while increasing inflationary pressures beyond the control of central banks.”

Temple expects the Russian-Ukrainian conflict to extend into 2024, as the Ukrainian counterattack loses momentum due to the approaching winter, while concerns grow about the reliability of Western funding and military aid.

“While a negotiated settlement is likely the only way to end the war, both sides are still far from the point of agreeing to surrender their grand plans — that is, for Russia to control all of Ukraine, and for Ukraine to control all of its sovereign territory.” lands,” he said.

As for the Middle East, the most “flammable” situation is the spillover of the conflict between Israel and Hamas into neighboring countries, including Iran, which could “turn into a regional conflict with global and military consequences.” The main risk of this type of escalation is the disruption of the transit of energy supplies through the Strait of Hormuz, through which about 20% of the world’s oil supply is shipped.

But Temple argues that all parties, including Iran, Israel and the United States, have strong incentives to avoid this outcome, and that the most important geopolitical situation from an economic standpoint is the multifaceted tensions between China and the West over competition and Taiwan.

“Taiwan’s early elections in 2024 will pave the way for the rest of the year. The DPP is currently far ahead of the more Beijing-friendly Kuomintang,” he noted.

“A DPP win will likely escalate tensions with Beijing, as the DPP is seen as favoring a formal declaration of independence, which is a red line for the Chinese government.”

The obvious consequence of direct industrial competition between China and the United States and concerns about China’s intentions in Taiwan is increasing supply chain fragmentation, as trade tariffs and barriers coupled with post-Covid logistical concerns have led advanced economies to pursue “support-a-friends” or “neighborhood” policies. of support.”

“These plans have turned out to be more difficult than policymakers imagined, given the inertia surrounding supply chains and the challenge of developing the necessary skills among workers in new places,” Temple said.

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

On the positive side, Temple suggested that continued low inflation should allow the US Federal Reserve and other central banks to consider cutting interest rates as early as the second quarter, which would “mitigate headwinds to growth and revitalize capital spending in anticipation of a cyclical economic recovery.” “. “.

Security and semiconductors

Mark Nachman, Head of Asset & Wealth Management at GSAM, and his team expect critical metals supply chains to gain attention due to their increasing importance in the clean energy transition, coupled with their potential exposure to supply shocks.

As a result, GSAM suggested that investors should avoid trying to time the market or make calls on bilateral political or geopolitical outcomes, but instead 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 resources as well as national security will emerge as long-term winners,” the strategists said, adding that companies with pricing power, solid business models and strong balance sheets should be the focus.

“The public equity market may provide opportunities to gain targeted exposure to more established companies that produce semiconductors and semiconductor manufacturing equipment, as well as industrial automation and technology companies that facilitate the reshoring of manufacturing.”

GSAM expects demand for natural gas products to rise, as countries seek affordable, reliable and sustainable energy, while increasing and more complex security threats create opportunities for cybersecurity platforms and aerospace and defense technology providers.