World map made out of blocks of various heights

Tensions Rising

Geopolitical Risk Dashboard

Geopolitical risks are rising and continue to influence the global economy and financial markets. The Stifel Geopolitical Dashboard identifies and assesses the likelihood and potential market impact of these geopolitical risks and possible events. Below we summarize two interconnected themes that are shifting the world order, provide an update on a few key geopolitical risks, and highlight potential opportunities that may result.

Just as we’ve used terms like “prewar” and “postwar” to delineate eras, the pandemic and the war in Ukraine are marking a shift to a more divided world with even more focus on localization and protectionism.

“… recent events are forcing companies and countries to rethink their supply chains, influenced further by national security and strategic interests.”

TWO THEMES INFLUENCE OUR GEOPOLITICAL DASHBOARD

Increased Localization and Protectionism

With every major crisis, people seem quick to declare an end to globalization, but the world may well be too digital and interconnected to deglobalize. That said, recent events are forcing companies and countries to rethink their supply chains, influenced further by national security and strategic interests. According to a report from Deloitte, American firms are expected to have reshored almost 350,000 jobs in 2022, an increase of 25% from 2021. It’s estimated that the move to reshore some production capacities could spur a 40% reduction in the share of shipments to the U.S. that originate from Asia by 2030.

A More Divided World

Around the globe there is a deepening divide between liberal democracies that align with the U.S. and more authoritarian nations that support Russia and China, solidifying alliances among competing geopolitical blocs. For instance, while the majority of countries voted in favor of a United Nations resolution condemning Russia’s claims of annexation in Ukraine, five countries (Russia, Belarus, Nicaragua, North Korea, and Syria) voted no and 45 countries, including China and India, abstained or declined to vote.

GEOPOLITICAL DASHBOARD

New Cold War

Last year we introduced the “New Cold War” as a geopolitical risk. Following Russia’s invasion of Ukraine, it is now more evident that we are in one. The U.S. and European allies imposed more than 2,700 sanctions in just 10 days and companies “self-sanctioned” by either suspending or fully withdrawing from Russia. President Vladimir Putin said the sanctions were “akin to a declaration of war.”

China has been watching the Western allies’ response carefully. Given the strong NATO unity during the coordinated response, China is less likely to initiate conflict in the South China Sea or Taiwan. China, however, has provided Russia economic support and this event, and the West’s response, is likely strengthening that relationship.

European Fragmentation

European Union (EU) member states showed unprecedented solidarity and self-sacrifice at the onset of the war in Ukraine. For example, Germany, Russia’s biggest EU trading partner, registered a 34% drop in exports to Russia in the first half of 2022 as a result of the sanctions.

The cold winter and energy crunch will likely cause local constituents to put pressure on their elected officials, leading to disagreements among EU members and a further test of European solidarity. There was disagreement on the level of Russian oil price caps as countries tried to balance putting short-term economic self-interest against longer-term mitigation of military aggression. Populism still remains a threat, most recently seen in Italy, where a right-wing coalition won the national election. Initial polls show that right-wing coalitions have a chance of gaining power in this year’s elections in Spain, Finland, Belgium, and Poland.

U.S.-China Competition

The declassified 2022 U.S. National Defense Strategy identified China as the “most consequential strategic competitor for the coming decades.” The rivalry shows no signs of easing. President Joe Biden and Secretary General Xi Jinping met to discuss bilateral relations and agreed to reopen dialog with an aim toward “responsible competition.”

The U.S. is attempting to deter China’s technological progress by announcing export bans on the technology, software, and equipment used in producing semiconductors. Last year’s CHIPS and Science Act was designed to boost U.S. competitiveness and innovation by aiming to catalyze investment in the domestic semiconductor industry. Similar initiatives can be observed in the biotechnology, aircraft, and cybersecurity industries.

Structurally Higher Inflation

Structurally higher inflation is a new risk that we are introducing to our geopolitical dashboard. While our base case calls for inflation to moderate during the year, there is a risk that the effects of the pandemic, the war in Ukraine, U.S.-China competition, and the climate change fight can lead to a prolonged period of higher inflation.

"The pandemic exposed the vulnerabilities of global supply chains. Governments and business are focusing on diversifying and reshoring some production over the longer term."

This, combined with a tight labor market and an aging workforce, increases the likelihood that wage inflation will be higher for an extended period.

Despite global monetary policy tightening, higher rates typically have less impact on food and energy prices, which are more susceptible to supply shocks. The war in Ukraine initially led to a major spike in energy prices. There are also other factors at play, such as chronic underinvestment in fossil fuel exploration and production since 2014, which may keep energy prices elevated for years.

Global food prices have moved higher in part due to the war’s impact on Ukraine’s agriculture industry. Higher fertilizer prices due to export quotas means less fertilizer can be purchased, which means lower crop yields. Ukraine has also seen a major decrease in wheat plantings due to destroyed fields and input shortages. Lastly, extreme weather events, such as the droughts experienced in 2022, have also driven prices higher.

INVESTMENT CONSIDERATIONS

The shifting geopolitical landscape may lead to investment opportunities. Increased localization and protectionism will require business logistics services and infrastructure development as companies build new factories and restructure their supply chains. The shifting workforce demographic trends are creating demand tailwinds for suppliers of industrial machinery, notably within automation and robotics.

The war in Ukraine and the heightened rivalry between the world’s great powers is leading to increasing militarization and defense spending. We believe this will also translate into a greater need for self-sustainability and protection of critical industries like technology, manufacturing, agriculture, and energy. As an example, cybersecurity companies should benefit as cyberattacks become more widespread, sophisticated, and disruptive as the world becomes more digital.

Geopolitical Dashboard

Event	Liklihood	Market Impact	Description
U.S.-China Competition	10	7	Competition for global leadership will impact markets; tech will continue to play an important role. The U.S. Department of Defense sees China as the “most consequential strategic competitor.”
The New Cold War	8	7	The Russia-Ukraine war is solidifying alliances among competing geopolitical blocs. U.S.-China and U.S.-Russia competition for influence are increasingly hostile.
Emerging Market (EM) Political Uncertainty	7	5	Many EM countries are facing COVID-related challenges, including higher food and energy prices. These can lead to increased inequality, political interference, and continued rise of populist ideas.
Cyberattacks	7	5	As society becomes more digitized, the world is more prone to cyberattacks. The risk of cyber warfare is increasing significantly.
Middle Eastern Tensions	7	5	Tensions in the region remain heightened. Iran nuclear talks are at a standstill, and the country is undermining stability by continuing to support terrorist groups and proxies.
Washington D.C. Gridlock	6	6	A divided Congress likely means limited prospects for significant legislation. The degree of political uncertainty may not be fully priced into markets.
Climate Change Stalemate	6	4	A U.N. climate agreement was reached where developed countries would pay for climate damage costs of developing nations. Still, major hurdles remain.
Major Terror Attacks	6	4	Unpredictable terrorist attacks may create disruption. The U.S. withdrawal from Afghanistan has amplified the risk of a resurgent terrorist threat.
South China Sea Military Conflict	5	7	China maintains a strong air and naval presence in the area, even as the U.S. upgrades airfields and other strategic infrastructure. There is potential for a military clash.
European Fragmentation	5	6	The energy crisis and resulting economic damage from the Ukraine war may test European solidarity. France and Germany are increasingly at odds on several key issues.
North Korea Conflict	5	3	North Korea continues to improve and expand its nuclear missile capabilities. In November, it test-fired an intercontinental ballistic missile (ICBM) with a range sufficient to reach the U.S. mainland.
Structurally Higher Inflation	4	8	The effects of the pandemic, the war in Ukraine, U.S.-China competition, and climate change could lead to a prolonged period of structurally higher inflation.
Russia-West Conflict	4	8	Russia has threatened retaliation in response to Western military support of Ukraine. Finland and Sweden have applied to join NATO, a potential doubling of the Russia-NATO land border.