Diplomacy/Foreign Relations
Taiwan’s election will lead to serious Chinese military and economic pressure but not full-scale war. War is a long-term concern. Investors should short TWD-USD.
In this brief Insight we examine the expanding Middle East conflict and update the situation in the Taiwan Strait on the eve of elections. The Houthis are a distraction and China is not likely to invade Taiwan in the near term, but both situations support our overweight of US equities relative to global. Global growth is likely to slow while commodities are likely to see at least minor supply shocks.
The market’s pricing of a soft landing means that geopolitical risks are becoming more, not less, relevant in 2024. US domestic divisions will invite challenges as foreign powers rightly fear that US policy will turn more hawkish after the election.
Oil prices will rise tactically due to supply risks. Recent developments indicate escalation of the conflict with Iran in the Middle East and confirm our expectation of energy supply disruptions and oil price spikes in the short run.
Democrats are favored to win the election until recession materializes. But recession risks are high. Investors should adopt a defensive and conservative strategy in 2024 amid extreme US policy uncertainty.
Global instability will continue in 2024 – whatever happens afterward. Slowing economies will exacerbate already high geopolitical risk and policy uncertainty stemming from the US election and foreign challenges to US leadership. Overweight government bonds, defensive sectors, the Americas versus other regions, aerospace/defense stocks, and cyber-security stocks.
Our political forecasting scored wins in 2023 but we failed to capitalize on it adequately in our trade recommendations.
A series of notable events took place over the Thanksgiving holiday but none of them force us to change our fundamental assessments. The conflict in the Middle East is likely to escalate rather than de-escalate, while the Taiwan Strait has at least a 50/50 chance of seeing tensions escalate next year.
President Biden is facing foreign challenges on three fronts and these challenges are coalescing around the critical states of the Midwest. Take risks off the table and stay defensive in 2024.
Investors should not get their hopes up about the Biden-Xi summit. Wait to see if a new ruling party is elected in Taiwan before downgrading geopolitical risk in the Taiwan Strait. US-China strategic détente is possible but neither the geopolitics nor the macro backdrop warrant a risk-on position next year.