“A major geopolitical realignment is taking place,” which, like 9/11, “shapes major governments’ foreign and military policies unpredictably for years to come.”
So wrote Citi’s market strategy team at the weekend in response to the unprecedented financial sanctions imposed on Moscow by many nations – and some remarkable policy U-turns in European capitals – after Russia invaded Ukraine.
If a global geopolitical shift of that magnitude is under way, it surely follows that a similarly seismic, multiyear shift in the global investment landscape is also upon us.
The immediate playbook for investors will be to “de-risk,” and pile into the safest or most liquid assets. This means moving out of stocks, credit, and emerging market assets, and into U.S. Treasuries, top-rated government bonds and the dollar.
But then what? Out of crisis always emerges opportunity.
“We are likely to see military, infrastructure and cybersecurity spending in the West not only increased but also speeded up,” Stefan Kreuzkamp, chief investment officer at DWS, wrote on Tuesday.
Defence and aerospace stocks have soared since German Chancellor Olaf Scholz’s bombshell on Sunday that Germany will commit about 100 billion euros (US$118 billion) to a fund for its military and ramp up defence spending to more than 2 per cent of gross domestic product, finally meeting a NATO target set out 16 years ago.
If all NATO countries agree to the 2 per cent of GDP target, billions more will flood into defence and related sectors.
Germany’s Rheinmetall AG jumped a record 25 per cent on Monday and gained a further 18 per cent on Tuesday to hit a new high of 159 euros a share. Military sensor maker Hensoldt rocketed 42 per cent on Monday and added a further 20 per cent on Tuesday to 25 euros a share.
“That is an area you would expect to see continued growth, especially if this extra spending from Germany and Europe comes through,” said Crit Thomas, investment strategist at Touchstone Investments, which oversees US$34 billion in assets.
If so, it would be a reversal of the “peace dividend” that followed the collapse of the Soviet Union and end of the Cold War three decades ago. The idea then was less defence spending would help reduce government borrowing, potentially paving the way for tax cuts.
That may flip in the coming years.
Focus on valuations
JPMorgan economists said Berlin’s defence pivot is one of a “number of profound political and policy implications” resulting from the Russia-Ukraine war that will reverberate for years to come.
Others may prove equally important. Take energy.
As worries intensify over supply and the impact of sanctions, near-term prices are spiking higher. Brent crude oil has leapt back above US$100 a barrel, and some analysts say European natural gas prices for the 2022-23 winter could be even higher than this winter.
Europe, which depends on Russia for about 40 per cent of its natural gas, will reduce that dependency and seek alternative sources. Italy’s foreign minister said on Monday that Rome will buy more from Algeria.
These changes will take a long time to come into effect, but once they do, the upshot may be that greater supply from other countries simply raises aggregate global supply. If so, price pressures may eventually be to the downside, not the upside.
Not only is Europe seeking to wean itself off Russian energy, it is leading the world’s climate-driven shift away from fossil fuels.
Germany’s government is preparing to speed up passage of the Renewable Energy Sources Act through its parliament so that it can come into force by July, according to a document seen by Reuters.
European offshore wind companies Vestas Wind Systems, Nordex and Orsted on Monday jumped more than 15 per cent, 13 per cent and 10 per cent, respectively. Investor interest in clean and renewable energy is only liable to increase.
On a broader index level, equity strategists at Citi note that investors’ response to most geopolitical events of recent decades has been simply to “buy the dip.”
But Phil Toews, who oversees US$2.2 billion at Toews Asset Management, reckons this approach can no longer be taken for granted because inflation is so high now that borrowing costs are bound to rise. Perhaps significantly.
He argues that the medium-term to long-term outlook boils down to valuation as much as sector. He notes that the S&P 500 index’s 12-month trailing valuation is still above 20 times earnings, consistent with a bear market.
When it is back down to the historical average around 15 times earnings, then it’s game on.
“Once valuations are washed out, regardless of the geopolitics, you can approach the markets with a new perspective. There will be potentially very good opportunities out there eventually,” Toews predicts.
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TORONTO – Canada’s main stock index was down more than 200 points in late-morning trading, weighed down by losses in the technology, base metal and energy sectors, while U.S. stock markets also fell.
The S&P/TSX composite index was down 239.24 points at 22,749.04.
In New York, the Dow Jones industrial average was down 312.36 points at 40,443.39. The S&P 500 index was down 80.94 points at 5,422.47, while the Nasdaq composite was down 380.17 points at 16,747.49.
The Canadian dollar traded for 73.80 cents US compared with 74.00 cents US on Thursday.
The October crude oil contract was down US$1.07 at US$68.08 per barrel and the October natural gas contract was up less than a penny at US$2.26 per mmBTU.
The December gold contract was down US$2.10 at US$2,541.00 an ounce and the December copper contract was down four cents at US$4.10 a pound.
This report by The Canadian Press was first published Sept. 6, 2024.
TORONTO – Canada’s main stock index was up more than 150 points in late-morning trading, helped by strength in technology, financial and energy stocks, while U.S. stock markets also pushed higher.
The S&P/TSX composite index was up 171.41 points at 23,298.39.
In New York, the Dow Jones industrial average was up 278.37 points at 41,369.79. The S&P 500 index was up 38.17 points at 5,630.35, while the Nasdaq composite was up 177.15 points at 17,733.18.
The Canadian dollar traded for 74.19 cents US compared with 74.23 cents US on Wednesday.
The October crude oil contract was up US$1.75 at US$76.27 per barrel and the October natural gas contract was up less than a penny at US$2.10 per mmBTU.
The December gold contract was up US$18.70 at US$2,556.50 an ounce and the December copper contract was down less than a penny at US$4.22 a pound.
This report by The Canadian Press was first published Aug. 29, 2024.
The crypto market has recently experienced a significant downturn, mirroring broader risk asset sell-offs. Over the past week, Bitcoin’s price dropped by 24%, reaching $53,000, while Ethereum plummeted nearly a third to $2,340. Major altcoins also suffered, with Cardano down 27.7%, Solana 36.2%, Dogecoin 34.6%, XRP 23.1%, Shiba Inu 30.1%, and BNB 25.7%.
The severe downturn in the crypto market appears to be part of a broader flight to safety, triggered by disappointing economic data. A worse-than-expected unemployment report on Friday marked the beginning of a technical recession, as defined by the Sahm Rule. This rule identifies a recession when the three-month average unemployment rate rises by at least half a percentage point from its lowest point in the past year.
Friday’s figures met this threshold, signaling an abrupt economic downshift. Consequently, investors sought safer assets, leading to declines in major stock indices: the S&P 500 dropped 2%, the Nasdaq 2.5%, and the Dow 1.5%. This trend continued into Monday with further sell-offs overseas.
The crypto market’s rapid decline raises questions about its role as either a speculative asset or a hedge against inflation and recession. Despite hopes that crypto could act as a risk hedge, the recent crash suggests it remains a speculative investment.
Since the downturn, the crypto market has seen its largest three-day sell-off in nearly a year, losing over $500 billion in market value. According to CoinGlass data, this bloodbath wiped out more than $1 billion in leveraged positions within the last 24 hours, including $365 million in Bitcoin and $348 million in Ether.
Khushboo Khullar of Lightning Ventures, speaking to Bloomberg, argued that the crypto sell-off is part of a broader liquidity panic as traders rush to cover margin calls. Khullar views this as a temporary sell-off, presenting a potential buying opportunity.
Josh Gilbert, an eToro market analyst, supports Khullar’s perspective, suggesting that the expected Federal Reserve rate cuts could benefit crypto assets. “Crypto assets have sold off, but many investors will see an opportunity. We see Federal Reserve rate cuts, which are now likely to come sharper than expected, as hugely positive for crypto assets,” Gilbert told Coindesk.
Despite the recent volatility, crypto continues to make strides toward mainstream acceptance. Notably, Morgan Stanley will allow its advisors to offer Bitcoin ETFs starting Wednesday. This follows more than half a year after the introduction of the first Bitcoin ETF. The investment bank will enable over 15,000 of its financial advisors to sell BlackRock’s IBIT and Fidelity’s FBTC. This move is seen as a significant step toward the “mainstreamization” of crypto, given the lengthy regulatory and company processes in major investment banks.
The recent crypto market downturn highlights its volatility and the broader economic concerns affecting all risk assets. While some analysts see the current situation as a temporary sell-off and a buying opportunity, others caution against the speculative nature of crypto. As the market evolves, its role as a mainstream alternative asset continues to grow, marked by increasing institutional acceptance and new investment opportunities.
