Embracing geopolitical uncertainty: Why discord presents lucrative opportunities for investors

21 February 2024, 08:10 | Updated: 21 February 2024, 09:57

• Anna Rosenberg is the head of geopolitics at Amundi

By Anna Rosenberg

@anna_rosenberg

With geopolitical worries thickening it is tempting for investors to succumb to pessimism. But remember that from a purely investment point of view discord also brings opportunity.

2024 will be filled with critical elections which means a higher chance of geopolitical strife. Fear of escalation in the Middle East is growing while the Taiwanese election sets the stage for further China-US disquiet. Aggressive rhetoric from North Korea fuels concerns there will be war with South Korea.

Unnerving as these developments may be, they should not be viewed solely through the lens of risk mitigation. Risk in one part of the world often brings opportunity in another – and not just in the Global South (those countries with a relatively lower level of economic development, typically located to the south of more industrialized nations) but in the West too.

You simply need to know how to spot the dynamics playing out.

Europe benefits from sitting at the intersection of US-China tensions. We might see more investment from China into Europe because it offers Beijing a relatively better investment environment than the US.

Since 2016, China’s disengagement from the US has been clear from the data. While we have not yet seen a significant increase in Chinese investments into Europe, mainly as a result of the long tail of China’s zero Covid policies, this is changing.

Chinese investment in Europe is growing, in particular in strategic sectors such as battery production and electric vehicle production.

While China’s motives are economic, ultimately, this adds new manufacturing jobs to Europe and will allow the EU to accelerate the green transition by providing cheaper batteries and electric vehicles at a faster pace.

Having some of the manufacturing supply chain on shore also allows European countries greater control.

So Europe offers Beijing a relatively safer investment environment than the US. And vice versa, European investors will also be ‘safer’ in China than their American peers.

Too much is riding on Europe’s economy to break with China, especially against the backdrop of President Biden’s Inflation Reduction Act, which has increased US-EU commercial competition.

In the Global South a significant group of winners are also emerging. These tend to fall into three groups.

There are the countries benefiting from the need to diversify away from China and Russia, and those helping China to diversify away from the US. These are countries increasingly at the centre of new or rejigged supply chains but also countries rich in natural resources and relative stability.

Malaysia and Vietnam are becoming more important places for shipping re-routing, while Morocco’s automotive sector has benefited from diversification because of the war in Ukraine. China is investing in Morocco and Mexico to better serve Western markets.

Japan and South Korea, with their geographic proximity to China and advanced technology sectors, are also benefiting from some of the divestment away from China.

Commodity-based economies are making the most of the situation too, not only by seeking to export more and finding new export destinations, but also by elevating their position in the value chain, transitioning from being predominantly commodity exporters to producers of intermediary goods.

For example, Indonesia has banned raw nickel exports, instead urging foreign buyers to invest in local smelters to process materials before they export. The policy aims to position the country a couple of notches higher up in the value chain.

Further, Indonesia’s plan to establish a domestic EV battery industry could lead to taxes on ferronickel exports, thereby lowering input costs for the homegrown Indonesian industry.

There are also countries benefiting from new security treaties with the US, as these often come with investment carrots that go beyond defence.

The Philippines is a good example. In addition to agreeing to host US military bases, it is receiving significant investment commitments from the US across various sectors.

Then there are the countries gaining global influence by establishing themselves as new poles in the increasingly multi-polar world.

India is benefiting from an abundance of new agreements spanning technology and green energy with the US, knowing that as the country’s new priority partner in Asia, it can ask for a lot in return.

Investors and businesses are right to be wary of an elevated period of geopolitical uncertainty. It is creating a global realignment of partnerships and supply chains, and there is a risk of tensions spilling over into more conflict and disruption. Add a busy year of electoral campaigning and you could forgive people for their pessimism.

But investors should also remember that geopolitical stress creates winners too.

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