Calculates the Bank of Spain that the impact of the Palestinian conflict is limited to just six dollars of increase in the price of oil and 10 dollars in the case of natural gas. Nothing that cannot arise from a bad week in the market (let’s say a storm in the Gulf of Mexico) or the statements of a minister from a producing country. All in all, Brent is the main vector of contagion in the Middle East tinderbox, or at least it is what the market has taken for granted for the last 50 years; specifically, since the Yom Kippur War and the oil embargo.
The data contrasts powerfully with the concern about the extension of the conflict. “The risks to financial stability derived from geopolitical tensions, which were already high, have increased with the appearance of a new source of tension in the Middle East,” explains the Bank of Spain in the same report in which it estimates the impact on prices. In this same line, Jamie Dimon, president of JP Morgan, expressed it clearly. “What worries me most is the geopolitical situation, whose effect on the economy we do not know.” […] We have already faced inflation, deficits and recessions before, but we had not seen something like this since World War II,” he said in an interview with CNBC prior to the Hamas attack on Israeli territory.
It’s not the only one. Pandemic, war and inflation have moved business pillars with unknown speed, extent and virulence. Entire sectors have been devastated by rising costs or a collapse in demand, others have made a fortune with profits that fell from the sky (energy, banking with rising rates) and the vast majority have had to rethink (necessarily or not) their supply policies. According to an EY surveyalso prior to the Gaza crisis, 78% of CEOs expect geopolitical tensions or conflicts to have a monetary impact on their organizations.
In a similar survey carried out by KPMG, geopolitics and uncertainty were the main risk to the growth of their business, whether due to the presence of a company in a conflict zone or the interruption of supply chains and the management of price fluctuations. “CEOs have understood that geopolitical risk is not just a short-term consideration,” the consulting firm emphasizes. In the same 2022 survey, political instability was the seventh risk to consider. Earnings season is corroborating the growing concern of top executives. According to Bloomberg, Air France, Accor, Baker Hughes, Intel, Mastercard, Japan Tobacco, Porsche and Whirlpool have cited geopolitics as a risk factor in their business.
The transversality should not be surprising; No matter how promising a sector is, no one is safe from the elements. Ask the wind turbine manufacturers. On paper, one of the big winners of an energy transition that would multiply installed wind power. The premise has been fulfilled, and the sector’s order book is overwhelming. But the three European leaders (Vestas, Siemens and Orsted) have severe financial problems. Each with its particularities, but with a common denominator: the inability to pass on extra costs to its clients.
Given the business conditions (high initial investment, low operating costs and a predictable flow of energy production), the promotion of wind farms is relatively easy to finance, as long as the initial price is fixed. A fact that leaves the risk of cost overruns in the hands of manufacturers already stressed by Chinese competition and rising interest rates. The sharp rise in raw material prices as a result of the war has depressed the margins of this theoretical winner of the energy transition. It is very significant that the Danish company Orsted, which has already announced extraordinary losses of 2,000 million due to cost overruns and rate increases, has given up on two offshore wind projects in the United States as a way to try to protect margins.
That the European Union is working on measures to promote the wind industry in the face of Chinese competition, including the investigation of possible anti-competitive practices, shows that the path of geopolitics is a two-way street. In the same way that the American Inflation Reduction Act has altered investment preferences for European companies. Along the way, Orsted has left 80% of its value on the stock market since the highs of 2021.
It is not, then, about posing geopolitics in terms of the imminent destruction of the world as we know it, but in the German term used by Olaf Scholz a few days after the Russian invasion of Ukraine: Zeitenwende, a turning point. history after which the world would never be the same. The chancellor, in this historic speech in the Bundestag, referred to the rise of totalitarian regimes such as the Russian one, but the speech modified Germany’s foreign policy and, with it, the energy mix that had provided cheap energy to German industry.
Disconnecting investment from geopolitics seems, in this context, somewhat naive. But the financial world remains faithful to its old ways: gauging whether a point more or less in the reading of this or that PMI index implies a greater or lesser probability that interest rates will fall sooner than expected by the majority market consensus. . Perhaps it is the way to manage uncertainty; looking for predictability where there is none. Or perhaps it is the opposite and, after all, geopolitical events can be interpreted as natural catastrophes against which one cannot protect oneself eternally.
In any case, if one thing is clear, it is that in the last four years geopolitics has mutated rapidly, and that these changes have brought profound economic consequences. Configuring the portfolio based on a single risk does not usually lead to optimal results (other parallel risks are usually ignored), but ignoring this factor is, to a large extent, living in a world that no longer exists.
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