Investors have a lot weighing on their minds with inflation, surging interest rates, and the looming possibility of a recession. Yet one other crucial risk factor demands attention: geopolitics. In today’s interconnected world, it’s essential to understand global politics to make wise investment choices.
Conflict is on the rise amid a shifting world order. As the ongoing war between Russia and Ukraine continues and renewed conflict breaks out between Israel and Palestine in the Middle East, one critical flashpoint looms large on the map: Taiwan.
With the Biden administration distracted, aiding its allies and partners elsewhere, Congress fears Beijing may exploit this strategic moment of distraction in the West to launch a surprise attack on Taiwan.
The specter of another war has grave implications for investors. Jay Powell, chairman of the Federal Reserve, warned last month that geopolitical tensions, “pose important risks to global economic activity,” and carry, “highly uncertain,” implications.
Corporate America is worried about the global landscape. According to the 2023 KPMG CEO Outlook survey, business leaders say geopolitics and political uncertainty are the most significant risks to growth in the next three years.
There is increasing demand among multinationals for geopolitical risk services, giving boutique consultancies like Eurasia Group an opening to brief boardrooms on the rising threats and conflict hotspots of the day. However, these firms don’t serve retail investors, who must figure out how to hedge against the next war alone.
As Saker Nusseibeh recently wrote in the Financial Times, many of today’s investors still operate under the assumptions of the last era of globalization. Most people have forgotten how decisive geopolitics can be in investment outcomes.
Investors can better navigate these troubling times by considering their portfolio’s risk scenarios and potential fallouts and staying informed of developments.
Get Across the Strait
“Cross-strait relations” (relations between Taiwan and China) have deteriorated in recent years, and Chinese President Xi Jinping is upping the ante. Last November, he told the People’s Liberation Army to “focus all its energy on fighting” in preparation for war.
The threat is not only rhetorical. China’s military is rapidly modernizing and expanding, and it has now surpassed the U.S. Navy in total battleships and intercontinental ballistic missile launchers (ICBMS).
The U.S. is not only losing its technological and military edge to China – its resources are increasingly stretched thin. Unlike China, the United States has many allies around the world. While this contributes to its global standing, it also increases the burden of protection as Washington is obliged to help defend its allies. With the U.S. actively engaged in other parts of the world, its military-industrial base may not have the capacity to arm Taiwan with enough weapons to repel China.
If the wars in Eastern Europe and the Middle East continue, could President Xi take advantage of the deteriorating situation and time a strike when the U.S. is least prepared for it?
The top brass in the U.S. military vary in their estimations of a timeline for China’s military action on Taiwan.
Director of National Intelligence Avril Haines said last year the threat would be “acute” through to 2030, while Admiral Philip Davidson, former head of American forces in the Indo-Pacific, has said China could attack Taiwan by 2027. Some see it coming sooner still. Air Force General Mike Minihan noted in January that the U.S. and China will probably be at war in 2025.
Taiwan Foreign Minister Joseph Wu told reporters in April that there is a serious threat China may attack in 2027.
There can be no knowing when, or even if, China will take decisive military action, leaving investors in a state of ambiguity. The risk of a conflict with China is higher than before and will continue to rise through the rest of this decade. Investors should take prudent measures in case conflict strikes.
Shield Your Portfolio
If there is a war between the U.S. and China, it will likely cause more damage to the world economy and markets than any military conflict since World War II. The seas around East Asia are some of the busiest shipping lanes in the world. With the devastating disruption of goods in and out of China, which remains the largest trading partner of most countries, the world economy would be catastrophic.
“A global depression would be all but guaranteed,” write Hal Brands and Michael Beckley in their new book Danger Zone: The Coming Conflict with China.
Taiwan is the global leader in manufacturing advanced semiconductors. Companies reliant on these goods would be particularly vulnerable in the event of a war. One prudent approach may be to trim back exposure to China-based companies. Yet, even this might not be enough.
“Realistically, if there is ultimately a conflict between China and Taiwan, I think the ramifications are going to be far more severe than necessarily worrying about which company you should be holding in the markets,” says Will Malcolm, a portfolio manager at Aviva Investors. “Even if you parked all your assets in the U.S., you’d still be very significantly exposed given the profound direct and indirect economic linkages to China and Taiwan.”
Another approach could be to allocate more of one’s investment portfolio into other safe-haven assets, whether by buying gold or real estate. U.S. property, for instance, may prove more shielded from the effects of foreign wars than the stock market, so purchasing an investment property may be a sound way to minimize exposure to a potential war in the Pacific.
One industry that tends to do well during war is weapons makers. Some investors may amp up their holdings of defense stocks. Spreading risk across various asset classes to offset losses is central to reducing overall portfolio risk.
Leading U.S. defense stocks rallied strongly after Hamas’ surprise attack on Israel on October 7. The iShares U.S. Aerospace & Defense ETF, which tracks companies including Raytheon, Lockheed Martin, and Boeing, was at its lowest point for 2023 on October 5, trading around $103. Yet, since then, it has rallied around 15% to reach its highest point for the year and is now trading around $120.
Defense stock also surged similarly in 2022 after Russia’s invasion of Ukraine prompted investors to revise their revenue forecasts for the sector in the coming years.
Geopolitical disruption is difficult to hedge against, yet there are no foolproof ways to prepare for it. However, keeping informed of current events, seeking expert financial advice, and storing up on safe-haven assets may help investors if the worst-case scenario occurs.
This article was produced by Top Dollar Investor and syndicated by Wealth of Geeks.
