Diplomacy/Foreign Relations
Positive economic surprises have delayed the onset of recession in the United States. But tighter monetary and fiscal policy, slowing global growth, and a looming rebound in policy uncertainty and geopolitical risk suggest that investors should buy insurance while it is cheap.
The Russian mutiny reveals the underlying trend of domestic instability. Russian instability is negative for global stability. The endgame of the war in Ukraine is exacerbating the problem, likely pushing up the equity risk premium.
Talks of a détente are premature and there is no domestic political basis in China or the US to support a true détente. Investors should not underappreciate global risk, on the basis of a détente, and should avoid Greater China equities in the next 18 months.
We are strategically bullish on the outlook of the energy sector. Domestic and external political constraints asserted themselves, restraining the most negative impulse against this sector by the Biden administration. Go long energy versus cyclicals (ex-tech).
President Erdogan and the Justice and Development Party emerged as the winner of the Turkish general election which was concluded yesterday. This victory means that their expansive policies of the past decade will continue, and Turkish assets will suffer. Across the Aegean, the Greeks voted to reelect the New Democrats under the leadership of Prime Minister Mitsotakis. Their fiscal prudence and structural reforms will be continued as voters had rewarded them with another term in office. Go long Greek versus Turkish equities.
The Turkish presidential election will go to a runoff in two weeks, but President Erdogan outperformed his opinion polls. His party, the incumbent AKP, won a majority in parliament. This outcome rewards Turkey’s inflationary policies and as such reinforces our underweight position in Turkish equities. By contrast, the Thai election reinforces our recommendation to stay overweight Southeast Asia relative to global equities.
Erdogan will most likely lose the Turkish election but it could go onto a second round. A strong opposition majority in the assembly would justify a tactical overweight in Turkish equities on a relative basis. For now, go long Turkish equity volatility.
Macro and geopolitical risks may spoil the narrow window for a stock market rally before recessionary trends rise to the fore.
In this week’s report, we look at the current de-dollarization discussion within the context of the USD’s near-term cyclical outlook, and whether it warrants a bullish or bearish stance.