Dynamic Allocation Strategies Team

Geopolitical Analysis

Geopolitical developments can impact market and currency prices—and client portfolios—over the short- and medium-term. We use a game theoretical framework to navigate these macro events.

WHAT WE BELIEVE

Long-term fundamental analysis is the team’s foundation, but fundamental analysis alone is not sufficient for global macro investors.

Geopolitical developments can impact market and currency prices—and client portfolios—over the short- and medium-term. Our team uses a game-theoretical framework to navigate macro events, which helps us:

  • Assess strategic interactions of multiple players
  • Better understand negotiations and related investment implications
  • Dynamically increase or decrease portfolio risk exposures

 

WHY THIS MATTERS

Geopolitical situations, such as the U.S. presidential election and Brexit, influence market and currency prices—as well as investment portfolios. One of our current geopolitical game theaters is focused on Asia, where a long-standing, multi-player negotiation about both trade and security involves Asian countries as well as the United States.

China and the United States are two dominant powers competing for economic and geopolitical influence with each other and among many Asian countries. This jockeying for influence involves using carrots and sticks relating to trade and to security issues. While “tit-for-tat” behavior is ever present, the larger but lower probability risk is that the dominant powers choose to meaningfully escalate their use of sticks directly upon each other. Another risk is that one of the less influential powers (South Korea, Taiwan & Vietnam, others in region) does something to prompt a strong response from the dominant powers. In assuming further global leadership, China is able to take a longer-term view by increasing its risk tolerance, which it may be happy to do. Similarly, the U.S. may feel more urgency to exert pressure where it still deems it has leverage (trade), given China's increasing relative endowment power and influence. Tensions between the two have increased as the U.S. leadership follows through on election commitments related to trade.

NAVIGATING THE ASIA GAME THEATER

Investment Implications: Winner + Losers

  • We believe that, long-term Vietnam, the Philippines, and Malaysia will benefit from China and the United States jockeying for coalition partners and influence, using carrots and sticks related to trade and security issues
  • Smaller countries like Philippines or South Korea may benefit from having multiple suitors
  • However, the shift to the implementation phase of trade threats between the U.S. and China represents a risk that was not present before
  • In the short- to medium-term, this environment is negative for U.S. equities, especially the IT sector, and most Asian equities and currencies

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