About this episode
As global conflicts escalate, our Global Head of Fixed Income and Thematic Research unpacks the possible market outcomes as companies and governments seek to bolster security. ----- Transcript ----- Welcome to Thoughts on the Market. I'm Michael Zezas, Morgan Stanley's Global Head of Fixed Income and Thematic Research. Along with my colleagues bringing you a variety of perspectives, today I'll be talking about current geopolitical tensions and their impact on markets. It's Wednesday, April 17th at 10:30 am in New York. Continued tensions in Middle East kept geopolitics in focus with clients this week. But markets seem to be shrugging off the recent escalation in the conflict, with relative stability in oil prices and equities. This implies some faith in the idea that the involved parties benefit from no further escalation – and will design responses to one another that won’t lead to a broader conflict with bigger consequences. But obviously, this tricky dynamic bears watching, which we’ll be doing. In the meantime, there’s a key market theme that’s underscored by these tensions. And that’s the idea of Security as a secular market theme. This is a topic we’ve been collaborating with many research teams on, including Ed Stanley, our thematics analyst in Europe, and defense sector research teams globally. The idea here boils down to this. Russia’s invasion of Ukraine, the US’ increased rivalry with China, questions about the future of NATO, and of course the Middle East conflict, all reminds us that we’re in a transition phase to a multipolar world where security is more tenuous. That requires a lot of spending by companies and governments to cope with this reality. In fact, we estimate that supply chains, food and health systems, IT, and more will require about $1.5 trillion of investment across the US and EU to protect against rising geopolitical risks. This means a lot more demand for global tech and industrials. And of course it means more demand for the defense sector. Regardless of whether US military aid plans continue to stall, there’s news of increased spending in China, Canada, and Europe. Our head defense analyst in Europe, Ross Law, and our head European Economist Jens Eisenschmidt have looked at this in recent weeks. They argue there’s scope for tens of billions of euros in extra spend annually in Europe, with a greater geopolitical shock putting that number into the hundreds of billions. It’s a key reason our equity research colleagues favor the US and EU defense sectors. Bottom line, geopolitical events continue to reflect the transition to a multipolar world. And as companies and governments seek security in this world, there will be market impacts. We’ll be tracking them here. Thanks for listening. Subscribe to Thoughts on the Market on Apple Podcasts, or wherever you listen, and leave us a review. We’d love to hear from you.