Geopolitics: A new global policy consensus

Institute of Managed Accounts Professionals

20 June 2023

To better navigate the complexities of geopolitics, investors need to anchor themselves in the big trends taking place globally. Matt Gertken explains how to apply geopolitical thinking to the macro environment.

Whilst geopolitical events can create massive volatility in markets, it’s not always the case that major volatility events have anything geopolitical to do with them, according to Matt Gertken — Chief Geopolitical Strategist at BCA Research.

Speaking at an IMAP Independent Thought Roundtable (in association with the Pendal Group), Matt says geopolitics are not about random events that occur but rather, are significant tectonic developments that happen.

“As an investor, a major part of understanding geopolitics is remembering to anchor yourself in these big trends,” says Matt. “These trends do eventually have major market consequences.”

According to Matt, the world is shaped by geopolitics. It’s a world of Russian aggression; a world where the U.S. and China have disengaged with each other; a world of heightened nuclear build-up; and it’s a world where the Middle East remains extremely volatile. These factors, he says, must be considered when constructing and managing investment portfolios.

Looking ahead

Matt points to three key geopolitical issues that are likely to play out over the coming years, and which will affect markets and investment portfolios.

1. China and Taiwan

Matt believes with China now having seen how disastrous the Ukraine situation has played out for Russia and the global support Ukraine has garnered, China will need to reappraise its approach to Taiwan. Therefore, he says the risk of China invading Taiwan over the short-term is not very high. And although we might see some other disruptions with Taiwan, like a trade war, it’s unlikely we’ll see a full scale invasion by China. However, there remains the risk of conflict over the long-term.

2. Russia and Ukraine

With Ukraine having recently launch its counter-offensive against Russia, Matt believes it’s important to note that the Russia/Ukraine conflict is far from over yet. Without a resolution, significant risks remain, which will continue to upset markets going forward.

3. U.S. and China

According to Matt, both the U.S. and China have internal issues to deal with, which creates instability in both countries. The Americans face a period of internal confrontation and considerable polarisation of voters, as they head towards the 2024 Presidential Election. Meanwhile, China is having significant problems with its economy, as it slips into a ‘middle income’ and liquidity trap.

“With China reopening from COVID-19, many people thought that would immediately revitalise the global economy. It hasn’t,” says Matt. “We’ve forgotten that China’s population is shrinking, the corporate sector is over indebted, households are in debt, and there simply isn’t a large appetite for risk in the private sector.”

Matt believes the world does need major diplomatic solutions and leadership in order to enable investors to feel more confident, but concedes that is unlikely to happen until at least November 2024 following the U.S. Presidential Election.

A new global policy consensus

Matt refutes the notion that geopolitics are just random exogenous events. Instead, he believes geopolitics sit firmly inside the macro economic landscape as part of a new global policy consensus, which rotates around increased national security. “As countries pursue an agenda of increased national security, it has considerable macro economic implications,” he says.

However, despite these challenges, Matt remains confident that over the short-term, inflation will start to moderate. But over the long-term, he believes we have entered into a permanently more inflationary paradigm.

“As investors, that’s something we need to get used to, as we seek to navigate the complexities of geopolitics in the macro environment.”

Matt Gertken is Chief Geopolitical Strategist at BCA Research. He spoke on geopolitics at an IMAP Independent Thought Roundtable in association with the Pendal Group.