Marko, the founder of the renowned BCA Research’s Geopolitical Strategy practice, has an unrivalled reputation for connecting geopolitical issues with the financial markets. Based on a short document that he kindly shared with us, the conversation will elaborate on what is in store for investors with a particular focus on political unrest and geopolitical risks.
KEY TAKE-AWAY
Geopolitics and politics, with their contingent tail or head winds, are a permanent feature of the markets. These trends can be forecasted, but to do so usefully, analytical focus should not be on politicians’ preferences but rather on what material constraints they face. “Preferences are optional and subject to constraints, whereas constraints are neither optional nor subject to preferences.” Politics and geopolitics create the investment context – its analysis must be an ongoing part of any investment strategy.
China will test Biden’s US. A ‘mini’ crisis (e.g. over Taiwan or disputed islands) is not unlikely, but this could in turn encourage positive compromise and communication. That said, Biden’s anti-Chinese rhetoric is more troubling to China than anything Trump came up with and this could have unintended and outsized market implications.
Hardening of Iran – US relations will provide a mild tailwind for oil prices together with US de-leveraging from the Middle East in general.
Un-orthodox ‘profligacy’ of central banks, (including the recent US 1.9 trillion $ stimulus package) marks a new era in fiscal policy that reflects the state of society and from which there will be no easy way to turn back. Policies will reflect and respond to the social ‘revolution’ and median voter expectations of a revised social contract. The pandemic has exacerbated this situation but the deep wrongs and inequalities, that need to be righted, pre-existed COVID-19.
Left leaning economic policies often come from the right and vice-versa. Right wing populists espousing the ‘Buenos Aires consensus’ (e.g. Bolsonaro), the US median voter no longer cares about ‘Washington consensus’ free trade. “Politicians are not price makers, they are price takers”.
Race to Zero will be the investment theme over the next twenty years. This marks an epochal change from the single-minded pursuit of scale to a new sustainable solution to produce less with less. The theme is still difficult to articulate in the public markets. The lack of a sophisticated private eco-system means that (over) valuation of green stocks remains an issue. Commodities are a public path into this investment theme.
Climate problems fast find themselves in the geo-political and security domain. Green technology that solves environmental issues will be vital for realpolitik and security – they will feed off each other. US Republicans will start referring to the ‘battery gap’.
Europe in general (and in particular European energy companies in terms of conversion to renewables) is leading the way in its efforts to green the economy.
For the full story, we encourage you to read Marco’s recently published book Geopolitical Alpha An Investment framework for predicting the future.
