About this episode
With multiple, ongoing geopolitical conflicts, our analyst says investors should separate signals from noise in how these events can impact markets. Important note regarding economic sanctions. This research may reference jurisdiction(s) or person(s) which are the subject of sanctions administered or enforced by the U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”), the United Kingdom, the European Union and/or by other countries and multi-national bodies. Any references in this report to jurisdictions, persons (individuals or entities), debt or equity instruments, or projects that may be covered by such sanctions are strictly incidental to general coverage of the relevant economic sector as germane to its overall financial outlook, and should not be read as recommending or advising as to any investment activities in relation to such jurisdictions, persons, instruments, or projects. Users of this report are solely responsible for ensuring that their investment activities are carried out in compliance with applicable sanctions. ----- 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, I'll be talking about the impact of geopolitical events on markets. It's Wednesday, February 7 at 5 pm in London. Geopolitical conflicts around the globe seem to be escalating in recent weeks. Increased US military involvement in the Middle East, fresh uncertainty about Ukraine’s resources in its conflict with Russia, and lingering concerns about the US-China relationship are in focus. And since financial markets and economies around the world have become more interconnected, it's more important than ever for investors to separate signals from noise in how these events can impact markets. So here’s a few key takeaways that, in our view, do just that. First, fighting in the red sea may influence the supply chain, but the results are probably smaller than you’d think. Yes, there’s been a more than 200 per cent increase in the cost of freight containers moving through a channel that accounts for 12 per cent of global trade. But, the diversion of the freight traffic to longer routes around Africa really just represents a one-time lengthening of the delivery of goods to port. That’s because there’s an oversupply of containers that were built in response to bottlenecks created by increased demand for goods during the pandemic. So now that there’s a steady flow of containers with goods in them, even if they are avoiding the Red Sea, the impact on availability of goods to consumers is manageable, with only a modest effect on inflation expected by our economists. Second, ramifications on oil prices from the Middle East conflict should continue to be modest. While it might seem nonsensical that fighting in the Middle East hasn’t led to higher oil prices, that’s more or less what’s happened. But that’s because disruptions to the flow of oil don’t appear to be in the interest of any of the actors involved, as it would create political and economic risk on all sides. So, if you’re concerned about movements in the price of oil as a catalyst for growth or inflation, then our team recommends looking at the traditional supply and demand drivers for oil, which appear balanced around current prices. Finally, as the US election campaigns gear up, so does rhetoric around the US-China economic relationship. And here we see some things worth paying attention to. Simply put, higher tariffs imposed by the US are a real risk in the event that party control of the White House changes. That’s the stated position of Republicans’ likely candidate – former President Trump – and we see no reason to doubt that, based on how the former President levied tariffs last time he was in office. As our chief Asia economist Chetan Ahya recently noted, such an outcome creates downside risk for the China economy, at a time when downside risk is accumulating for other structural reasons. It's one reason our Asia equity strategy team continues to prefer other markets in Asia, in particular Japan. Of course, these situations and their market implications can obviously evolve quickly. We'll be paying close attention, and keeping you in the loop. 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.