As 2022 ends, we can observe the wide influence of geopolitics on financial markets, starting with the Russia-Ukraine war, tensions between China and Taiwan, as well as internal politics in the US. In a recent insight, Aviva Investors takes note of the various geopolitical events around the world and discusses the potential impact they will have on investor portfolios.
“Energy prices, sanctions, economic decoupling, the cost-of-living crisis and galloping inflation have all stemmed from the conflict (Russia-Ukraine war), reminding us just how much politics can impact financial markets,” writes Sunil Krishnan, Head of Multi-Asset Funds, Aviva Investors.
Starting with the recent leadership change in the UK, and the follow-on mini-budget, the investment manager says that the new UK government took investors and independent experts for granted. Tax cuts, higher borrowing, and a cap on household energy prices are some the features of the new UK budget, but Krishnan says that there was no discussion on how these giveaways will be funded.
Bond yields in the UK have risen dramatically while the sterling plunged. While fixed income volatility is likely to continue in the UK, Krishnan says, “On the bright side, UK companies have benefitted from sterling weakness.”
In China, Xi Jinping’s third term in office and the rejig of the top leadership spooked investors. As China focuses on common prosperity, Aviva says that the priorities of minority investors may be sidelined in favour of domestic shareholders.
“Western investors and companies need to prepare for the possibility of an increasing economic decoupling between the West and China, and a more “muscular” Chinese foreign policy, particularly towards Taiwan,” as per Krishnan.
Meanwhile, the recent mid-term elections in the US saw a slim majority of the Republicans in the House of Representatives, while the Democrats won in the Senate. Aviva believes that any major finance-related programmes may face issues with passing divided Congress. Any further fiscal stimulus expectations have also been scaled down by the investment management firm.
As the US approaches a likely recession in 2023, Krishnan says, “It is still hard to find signs of a meaningful slowdown, but were we to see that, the fiscal room for manoeuvre in a divided government is likely to be less.”
View the complete insight here.
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