Geopolitical risks will re-emerge in 2024 as top concern for markets
Despite widespread disruption over the past year, geopolitical tensions took a back seat in 2023 as markets focussed on monetary policy and inflation. But as we look ahead to 2024, geopolitical risks will again rise to the top of investors' agendas.
What's happening: Recent events, including the Russia-Ukraine war, the impact of the Chinese Covid-zero policy, and the fallout from the collapse of the unsustainable "Islamic State" have all taken their toll on the global economy and financial markets.
Results so far: Nevertheless, markets have shown resilience and, in many cases, decoupled from these geopolitical shocks, suggesting that other factors such as inflation, interest rates, and earnings trends are currently more critical to market performance. But the lull in geopolitical tensions may not last long.
Five key questions on geopolitical risks for the next year: As we prepare to provide advice and build resilient investment strategies for our clients in 2024, Jarden's Geopolitical Research Team is asking five key questions about the geopolitical landscape that will impact investments over the next year:
- Will the Ukraine-Russia war escalate or de-escalate in 2024? Despite predictions that the war would be over by now, Russia's invasion of Ukraine continues to burn, keeping energy and food prices elevated and disrupting markets. Both sides are entrenched in a stalemate, and a clear resolution remains elusive.
The prospect of further military breakthroughs that would materially shift the trajectory of the conflict remains low. At the same time, a full de-escalation is also not on the horizon as both sides continue to mobilise troops and military assets.
The risk is that the conflict, or related geopolitical tensions, could spill over into neighbouring countries, becoming a broader geopolitical crisis that impacts even more markets.
- How will China's new leadership approach geopolitics and portfolio risks? The Chinese Communist Party's once-in-five-years congress in October finalized the country's leadership for the next term, culminating in the coronation of Xi Jinping for a third term.
This event removes some near-term uncertainty, but the new leadership could also heighten geopolitical risks. China's ongoing strategic competition with the US and its regional geopolitical ambitions, particularly over Taiwan, are key concerns.
The risks emanating from China go well beyond Taiwan, including human rights violations, technological competition, and a hardening domestic market, making it a critical geopolitical factor for investors to watch in 2024.
- Will the US-China technological cold war escalate further? The US-China technological cold war will continue to escalate in 2024, impacting global supply chains, trade, and investment flows. The US government continues to push for more domestic production across industries and to reduce dependencies on China, especially in semiconductors and critical materials.
The funding allocated to these efforts under the recently passed CHIPS Act and the Inflation Reduction Act will start to kick in 2024, meaning geopolitical overtones around technology will rise in the US political discourse, impacting markets.
At the same time, China will likely continue to push for technological self-sufficiency, reducing its vulnerabilities and pushing back against US pressures. The result is that global supply chains will continue to shift, causing opportunities and disruptions in various markets.
- Will the inflation-related energy crisis persist? The geopolitical dimensions of the energy crisis are multi-faceted. The Russia-Ukraine war has kept a lid on energy supplies, especially natural gas, in Europe, and any escalation in that conflict would exacerbate the problem.
But globally, energy prices have already peaked and are moderating after a remarkable 2023. A mild European winter and warmer-than-usual conditions in North America have helped push natural gas prices sharply lower, currently below their 10-year averages in the US and Europe.
However, these price declines may be relatively short-lived. As the weather gets colder in the northern hemisphere, natural gas inventories are still relatively low, and geopolitical tensions remain elevated, there is the risk of another spike in energy prices and inflation in 2024.
- Will there be a meaningful de-escalation in other geopolitical risks? While the headlines were dominated by the Russia-Ukraine war and China's zero-Covid policy, other geopolitical risks remained elevated throughout 2023.
In 2024 and beyond, Jarden is specifically watching climate change-related geopolitical risks, the potential collapse of the Islamic State, and the humanitarian crisis in Syria to name a few.
These and other geopolitical risks may not have the direct market impact of the above mentioned, but they can significantly affect markets and economies over the long run and should not be overlooked.
Geopolitical tensions and shocks can no longer be ignored as exceptional or one-off events that don't impact markets. Instead, they have consistently proven their ability to shape financial market performance and are a key factor in portfolio construction. As we have seen, geopolitical risks can affect inflation, interest rates, earnings, and economic growth, directly and indirectly impacting asset prices.
And while 2023 has been a year of unexpected resilience in the face of these risks, geopolitical tensions and shocks remain a significant concern for the year ahead. The questions highlighted above highlight the complexities of today's geopolitical landscape and help frame the challenges that investors will face in 2024.