Tuesday, February 27, 2024

Geopolitical fragmentation continues

Geopolitics has become a constant and structural risk, increasing its impact on markets in the last five years. The world is facing a real cascade of crises, from the US trade wars to the COVID-19 pandemic, the Russian invasion of Ukraine, and now the conflict in the Middle East. These events have accelerated global fragmentation and the emergence of competing geopolitical and economic blocs.

The above is in contrast to the globalization and geopolitical moderation that took place after the Cold War. Thus, globalization is changing along geopolitical lines as countries and companies favor national security and stability over pure cost efficiency. Therefore, it is not surprising that markets are paying more attention to geopolitics.

“Deeper fragmentation is expected, with more intense competition and less cooperation between countries. But the reconfiguration of globalization gives opportunities to countries like Mexico, India and Vietnam.

Geopolitical fragmentation is one of the reasons for continued inflationary pressure and interest rates that remain above pre-pandemic levels. Supply chains are becoming longer and more complex as “connector” countries such as Mexico and Vietnam increasingly act as intermediaries between different geopolitical blocs. These countries can benefit from inter-bloc competition, but it will require significant investment in areas such as critical infrastructure for the benefits to be fully realized.

Companies that have proven resilient in changing supply chains have a competitive advantage; others will also benefit from industrial policies such as the US Inflation Reduction Act.

The economic and market impact of fragmentation will depend on whether the changes in the world order are smooth or not. Greater geopolitical volatility and increasing global conflicts increase the risk of a more turbulent and unpredictable path. However, while stocks and other assets react quickly to geopolitical events, there are concerns that they have not shown that they have entered a new geopolitical regime where previous strategies no longer apply.

As for the risks to watch out for, rising tensions in the Gulf due to the war between Israel and Hamas are showing. The risk of escalation is high, with attacks by Iran-backed groups on the rise. The Red Sea shipping disruption shows how conflict can spread to disrupt supply chains and increase production costs.

Likewise, the risk of strategic competition between the US and China remains high. The November meeting between the presidents of the two countries helped to establish a more positive tone in relations, expanding short communications. But Taiwan remains a flashpoint, as recent elections have shown. All indicate that intense competition between Washington and Beijing is the “new normal,” especially in defense and technology.

In short, deeper fragmentation is expected, with more intense competition and less cooperation between countries. But the reconfiguration of globalization presents opportunities for countries like Mexico, India, and Vietnam. It will also encourage more investment in advanced technology, clean energy, defense, and other sectors critical to each country’s geopolitical goals.

World Nation News Desk
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