In the latter part of 2022, Singapore’s Deputy Prime Minister Lawrence Wong stated that “the golden age of globalisation has ended and a fundamental change to the way the world works is underway.”
YOUR CAPITAL IS AT RISK
To name a few of the recent geopolitical developments influencing Mr Wong’s statement.
- A pronounced political upheaval in continental Europe
- The completely reorganised global energy supply chains from the prior year
- Divergent opinions on the appropriate manner to deal with COVID-19
- The unsettling of the Nixon-era Saudi-US petrodollar arrangement
A quote from Vladimir Lenin, “there are decades when nothing happens, and there are weeks when decades happen.” The past 12 months certainly have underlined the continued relevance of this aphorism.
To pour more fuel on the fire of the rate of change, technological developments are about to be supercharged by readily available and user-interface-friendly artificial intelligence (AI), such as the recently released OpenAI ChatGPT.
Global stock markets are under duress due to rampant inflation and the US Federal Reserve’s attempt to quell prices through the rapid rises in benchmark borrowing and lending rates. With global markets presently so focussed on the Fed’s actions, could political developments blindside investors?
Here we will attempt to outline four political factors that could potentially affect the stock market in 2023.
International government relations have been front and centre for the last few years, with international coordination on COVID-19 uniting some nations and driving a wedge between others.
If the de facto lines of allegiance were pencilled through COVID-19, energy and supply chain security has sought to ink over them.
Those nations exiting from COVID-19 hibernation have been presented with a very different world in which trading partners and long-term foreign direct investing partners have been irrevocably replaced.
The Nixon-era petrodollar arrangement is entering its final days as the US swings toward being a significant oil exporter in direct competition with the newly formed OPEC+ cabal.
The United States is redefining its relationship with OPEC+ by using Chevron Corp NYSE:CVX (CVX) to revamp OPEC member Venezuela’s oil production, just as OPEC plans to impede their own group’s output. In response, Saudi Arabia is now looking east to draw up a similar Nixon-era multi-decade arrangement with China.
This shift in international relations will reverberate around the Middle East and further afield for decades.
On the stock market, this will be felt most by the US producers and refiners no longer operating under any favoured relationship, with the east being more reliant on the European and LATAM markets.
The European sector is a market in which the overarching policy is a shift to a vast reduction in its reliance on oil over the coming months and years. Gulf of Mexico refiners Valero Corp NYSE:VLO (VLO) and Phillips 66 NYSE:PSX (PSX) may have their best years behind them due to this shift.
Geopolitical demarcation is very fluid, and no sooner will doors open to investment opportunities than close to a change of course under the guise of political fortunes. For this reason, investment decisions are still best applied to fundamental company research and the within-boundary impacts of political actions.
The future world order is seemingly less certain than it has been in the last 70 years, so one can expect geopolitical fortunes to have an outsized impact on the stock market in the years ahead.
YOUR CAPITAL IS AT RISK
Far and away the most significant aggregate direct impact on corporate profits and, by extension, company valuations is the current taxation policy.
The UK recently announced a rise in the corporate tax rate to 25% from 19%. Such a steep rise reflects the UK government’s requirement to enter a period of austerity as it battles rising prices and the adverse effects of Brexit.
Business leaders welcomed the clarity, and the announcement helped to stabilise the pound and the wider economy as a clear path forward was outlined by the Rishi Sunak government.
In the US, the oft-maligned ‘carried-interest loophole’ lives to fight another day. Private equity has experienced over a decade of growth, expanding into energy, technology, and real estate.
On the plus side, the private equity explosion has allowed the full potential of intellectual property to be exploited, carrying many thousands of jobs with it. Any bi-partisan move to close the loophole due to concerns of a budget gap will likely put those jobs at risk.
As international government budgets come under strain from high prices and shift toward an austerity stance, corporate investment and expansion may become less favourable under reduced return metrics brought about by higher taxes.
Higher corporate taxes combined with the shutting out of private equity from the lower taxes presented under the carried-interest loophole will likely form a cloud over the UK, Europe, and the US corporate environment and, by extension, general employment.
YOUR CAPITAL IS AT RISK
Financial regulation comes in many shapes and forms, with rules to protect all manner of stakeholders, from the investor to the consumer, the electorate of a state, and so on.
The depth and breadth of regulations are extensive and difficult to import into any meaningful analysis unless one has a detailed understanding of the regulation and its supposed impact.
With that being said, certain areas of business and finance are ripe for new regulations, either through the misconduct of its actors or the now outsized impact the industry has on key stakeholders that warrants protective barriers being built.
The FTX collapse has most certainly opened the door to new legislation across the globe. The size and scope of the losses, caused by what appears to be massive corporate wrongdoing, will likely usher in new legislation designed to protect crypto investors.
Regulations often have an undesired impact, so it is worth keeping that in mind if you’re presently an investor in crypto-market participants likely to be the most impacted by new regulations. This bracket will most certainly include centralised exchanges, for example, Coinbase Global, Inc NASDAQ:COIN (COIN).
Another area bound to see a shift in new regulations in 2023 is technology and data privacy. Europe has already seen a significant shift to the consumer-friendly data privacy act (GDPR), much to the chagrin of Meta Platforms, Inc NASDAQ:META (META). Expanding this policy to US shores could have a wide-ranging suppressive impact on the types of data and depth of market for the social data-harvesting companies like META and Snap Inc NYSE:SNAP (SNAP).
California, Virginia, Colorado, Utah, and Connecticut are already considering new comprehensive consumer privacy laws. If they are popular, supporters of the changes will find some momentum with a Federal mandate, but nothing is in the works at the moment.
A Federal data privacy act can potentially hamper several prominent social media companies and their data harvesting practices. It is bound to impact corporate valuations and is worth keeping an eye out for if state legislation is passed.
YOUR CAPITAL IS AT RISK
Much was made of an anticipated shift to the right of the political spectrum in recent European and US leadership and mid-term elections. The conservative factions won in Italy and Sweden, though the so-called ‘red wave’ was more of a trickle in the US.
The US House of Representatives barely swung to the GOP, with the Democrats holding the Senate. In Europe and the US, a centred liberal democracy is still very much de rigueur.
Suppose there is an increased focus on rising geopolitical risks. In that case, it seems probable that the more nationalistic element under the banner of strength and security will continue to make headway with voters.
By and large, conservative and right-leaning voters tend to favour more self-sufficiency, lower government spending, stronger armed forces, and reduced taxation.
These themes may carry over into the stock market as defence contractors like Lockheed Martin NYSE:LMT (LMT) and BAE Systems PLC LSE:BAE (BAE) find their wallets flush with government spending.
Outside of defence, a shift to the higher interest rates required to defend currencies will reduce government balance sheets and may favour financials, provided credit quality doesn’t deteriorate too much. Banks like Lloyds Banking Group plc LSE:LLOY (LLOY) and JP Morgan Chase & Co NYSE:JPM (JPM) will favour such an economic landscape.
All signs point to major upheavals in the global political landscape in the next 12 months, and technological advancements have raised the stakes for all market participants. Large government debt piles post-COVID layered on ever faster-shifting labour and resource supply chains leave government actions ever more critical. Changing tack under high winds in laden vessels and crowded water takes expert planning and execution, lest we all run aground.
Always do your due diligence and consult with the experts where you can. Asktraders.com has made a wealth of data and information available for you. It is vital to read up and understand what you’re getting into before you make any investment decision.