Looking Beyond the Current Turmoil

With the constant barrage of economic and geopolitical worries, it’s easy to become caught up in the short term. Certainly, the next few years are going to be difficult for investors to navigate. But I am mindful that however treacherous conditions become, the storm eventually ends. So, it is critical to keep focused on the long term and ensure that you are positioned and ready for when it does.

The major problems and risks the world faces now are well known.

  • Inflation

  • A dysfunctional USA

  • Russian invasion of Ukraine

  • Potential for Chinese invasion of Taiwan

Beyond these we’ve also got the second and third order effects as issues come to a head.

  • Energy crisis

  • The risk the EU fragments

  • The end of globalization and supply chain disruption

  • Potential for dislocation in financial markets

Any of these seemingly once in a generation problems are difficult enough to deal with but as they all converge, the global situation is particularly fraught. Throw in a black swan event here or there and it’s anyone guess how things unfold in the short term. But what about the long term? Call it 5 or 10 years. What does it look like as the world grapples with these issues and moves forward?

Firstly, and perhaps most importantly the world in 10 years will have solved the energy issue in terms of continuity of supply. Most nations will have put in place plans to ensure their national security by learning the lessons from the energy crisis unfolding in Europe. No nation will want to have their national security compromised because of vulnerabilities in their energy supply.

The biggest mistake Germany and Europe made was becoming dependent on Russia for their energy supply. It is at the heart of much of turmoil Europe and the world now face. It is an historic strategic blunder that will serve as a warning for decades to come. Yet it may serve a purpose that enables the west to pre-emptively manage a far greater threat, the world’s supply chain reliance on China.

That brings us to the end of globalisation. Beyond securing energy supply countries and their businesses are now thinking much more strategically in terms of their supply chains. Dependency on other countries is a risk and one all nations are now moving to mitigate. This means reshoring supply and aligning with allies. It means that the cheapest provider is not the best, rather it’s the cheapest provider within the context of supply chain continuity and national security.

In other words, the way the western world is rapidly removing its dependency on Russia is happening with other nations who are seen as threats. This means China. Over the next 5–10 years expect to see businesses and nations alike work furiously to remove their dependency on China. While it will certainly have an inflationary impact, it will result in a boom for local industries and allied nations who will be the primary beneficiaries of the reshoring phenomenon that will evolve.

It will ultimately lead to the division of the global economy into one consisting of the west and its allies and another separate economy with China and Russia at its centre. If your country or business is not working to remove its supply chain dependency on China, you face an existential threat when China does ultimately invade Taiwan. Now that might be in 1 year or it might be 10 but the one thing that China has made clear is that it will take Taiwan back in due course and has not ruled out using military force.

So where do you look for safety as you navigate such turbulent times?

Energy is a big one and an obvious one. As well as the infrastructure around securing it. Expect massive investment from almost every country in energy production. In the short term, that means almost any form of energy because of the shortage. But in the long term, it’s going to dramatically accelerate investment in sustainable energy. The UK recently announced energy subsidies and concessions for consumers and businesses that are uncapped but forecast to cost $200b over the next 2 years because of the issue they find themselves in. Imagine if they’d had the foresight to spend that much on sustainable energy over the last decade.

Manufacturing and services are another. Think of any product that is primarily ‘made in China’ and in the future it will be sourced from the best priced western nation or ally. There is a lot of opportunity here. It will increase inflation globally as removing the lowest cost provider from the equation means everything will cost more, but it will be a necessary cost of removing embedded vulnerabilities from the system.

Technology is another. While the sector is broadly out of favour with investors at the moment, technological change is and will continue at a rapid pace. The most obvious area is in the reshoring of computer chips. Everything these days contains them, and the world can’t really operate without them. China currently controls much of this market and the west, especially the US is in a race to ensure they remove their dependency on China in this regard. But beyond computer chips, technology as a broad sector will continue to grow at a rapid pace and in my opinion remains, as it has for decades, the biggest opportunity for investors.

In the long term, we can look past inflation as I anticipate central banks will bring it under control in the next few years. How high rates ultimately go, how high they stay and the damage done to the economy in the short term is another issue. While the world current faces several big issues its worth keeping in mind that these are problems that can and will be fixed. Over the long term I expect there to be significant opportunities evolve as industry moves to protect its businesses and countries move to protect their economies and their national interests.

General Advice Disclaimer: This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you. Historical performance is often not a reliable indicator of future performance. You should not rely solely on historical performance to make investment decisions.