At the Intersection of Geopolitics and Geoeconomics

April 23, 2024 | Volume 7, Issue 4 | The BlackSummit Team

Here is a summary of important events that unfolded over the last month, and which may affect economic, financial, and geopolitical issues in the months ahead. Furthermore, we share our thoughts on the market implications of the reported developments.

Top News This Month

• The White House hosts the first US-Japan-Philippines trilateral summit.

• European lawmakers approve a major overhaul of the bloc’s migration laws.

• South Korea’s opposition party wins landslide victory in parliamentary elections.

• Israel and Iran exchange retaliatory attacks as Israel continues its offensive in Gaza.

• The US reinstates oil sanctions on Venezuela.  

• Bassirou Diomaye Faye makes history as Senegal’s youngest president and promises to bring sweeping reform following years of turmoil.

North America

• After a long stall in momentum due to some Republicans in the House of Representatives, the House has finally passed a $95 billion military aid package for Ukraine, Israel, and Taiwan. The lion’s share of funds – over $60 billion – will go towards helping Ukraine, with over $26 billion going towards Israel, and a little over $8 billion allotted for the Asia-Pacific, mainly Taiwan. The bill has bipartisan support and is expected to pass through the Senate and may be signed by President Biden as soon as early next week.

• The leaders of the US, Japan, and the Philippines held the three’s first trilateral summit at the White House, bolstering the relationship between them and reaffirming Washington’s commitment to what it calls a “free and open Indo-Pacific and international order based on international law.” The summit also addressed China’s increasing hostility in the South China Sea towards the Philippines, as well as near disputed territory with Japan near Taiwan.

• US President Joe Biden held a phone call with his Chinese counterpart, Xi Jinping, to discuss their two countries’ economic relations, the Ukraine war, and threats in the cybersecurity realm. Biden addressed concerns about China’s trade practices as well as national security risks from China’s access to US technology. Xi argued that US trade restrictions on China are damaging the two’s relationship. Later, US Treasury Secretary Janet Yellen met with Chinese Premier Li Qiang to further discuss trade and economic issues, with both sides coming away from the meeting saying that the continued diplomacy between the two has been instrumental in stabilizing their fraught relationship.

• Chipmaker Taiwan Semiconductor Manufacturing Company (TSMC) is pouring more money into Arizona, bringing its total investment there to $65 billion. This expansion is backed by potential government support of $6.6 billion and will make it the largest foreign investment ever in the US. Meanwhile, the US government is awarding Samsung over $6 billion to build new chip factories and a research center in Texas. This is part of a bigger push to boost domestic production of semiconductors, and it will more than double Samsung’s total US investment to over $44 billion.

• Market Implications: The aid package should have positive effects on US defense-related stocks. The market, given macro conditions, may be going through a transition from growth to value appreciation. Earnings are expected to grow at a healthy pace, however, a slowdown in spending as well as in earnings growth, is expected starting in Q3. Geopolitical tensions will continue to have a toll on the market, and thus hedging and anchoring are recommended.

Europe

• Ukraine is struggling against Russia’s invasion, facing twin crises of equipment and manpower shortages. Russian forces have seized momentum on the battlefield on the front lines, racing for gains in time for Moscow’s commemoration of World War II Victory Day. Despite heavy losses for the Russians, Ukrainian forces are being forced out of tactically important areas. Ukrainian officials say that newly-approved US aid could take weeks to reach the front lines. Meanwhile, Russia’s defense minister held his first phone call with his French counterpart since 2022 after President Macron’s statements about potentially sending French soldiers to Ukraine itself. France has clarified that the suggestion would be for operations away from frontlines.

• The US and the UK have both banned the London Metal Exchange, the Chicago Mercantile Exchange, and others from offering metals produced by Russia (including aluminum, copper, and nickel). The supply of Russian metals was already small in both countries after London banned imports and Washington imposed high tariffs, and Russian metal suppliers have already shifted towards the Asian market, which has now become their largest. These latest sanctions are designed to further reduce the price of Russian metals, thus lowering the amount of export revenue Russia can spend on its war against Ukraine. 

• Turkish President Erdogan’s AK Party suffered a setback in Turkey’s recent local elections, marking the first time since its establishment in 2002 that the party lost the popular vote. The defeat was particularly pronounced in key cities like Istanbul and Ankara, which had previously been strongholds. The main opposition group, the Republican People’s Party (CHP), made substantial gains, securing victory in 35 out of 81 municipalities and 14 out of 30 urban areas. Ekrem Imamoglu, the CHP candidate, was re-elected as the mayor of Istanbul with 51.1% of the votes. These results unfolded against a backdrop of economic challenges, including high inflation and a sharply declining lira.

• European Union lawmakers have approved a major overhaul of the bloc’s migration laws, aiming to end years of division and counter controversial narratives ahead of June elections. The reforms address the thorny issue of responsibility for migrants upon arrival and whether other EU countries should be obliged to help. However, the new rules include controversial measures such as taking facial images and fingerprints from children as young as 6 and allowing for fast-track deportations. Migrant and human rights groups have criticized the reforms, saying they fail to offer sustainable solutions and could lead to human rights violations. The approval of these reforms highlights the ongoing challenges and debates surrounding migration policy in the EU.

• Market Implications: The expected lower rates from the ECB could weaken the euro against the dollar. However, that should be a boost for European equities which have performed decently this year. Spending should also assist the anemic European growth which, depending on geopolitical developments, may need to focus on defense spending while it is also imperative to start addressing its demographic and pension challenges.

Asia, Eurasia, & the Pacific

• A record number of voters in South Korea’s recent parliamentary election resulted in the liberal opposition party, the Democratic Party, winning a landslide victory with 175 out of 300 seats. The ruling conservative People Power Party suffered a significant setback, securing only 108 seats, and becoming a smaller minority. This puts President Yoon Suk Yeol in a challenging position for the remainder of his term, hampering his ability to implement business-friendly policies and tax reforms. The opposition is likely to use its legislative power to limit Yoon’s initiatives. The elections were seen as a midterm confidence vote for Yoon, who has faced criticism over scandals, economic issues, and a medical crisis. His ability to pursue key policies is now constrained as he is expected to face pressure to cooperate with the opposition.

• The Myanmar civil war – launched after a military coup in 2021 – is evolving, with anti-coup forces claiming to have captured a key town on the border with Thailand, Myawaddy, which sits on a major trading route. The coup leaders have intensified air strikes and conscription efforts as it faces a broad coalition of enemy forces on multiple fronts. Thailand’s freeing minister made a visit to Mae Sot, a Thai town that lies across the border from Myawaddy, where Myanmar’s military troops wait to cross after the rebel’s capture of the town. Thailand announced it was prepared to accept 100,000 people fleeing the conflict overall, but warned that the fighting should not cross into Thailand’s airspace.

• Singapore Prime Minister Lee Hsien Loong announced his departure from office after being in power for 20 years, saying that he will hand power to Lawrence Wong, the Deputy Prime Minister. Lee, who is 72, originally planned to step down earlier but was delayed due to COVID-19. Lee claimed that passing power to Wong before the city-state’s elections next year would allow Wong to win a political mandate and successfully lead the country. He would be Singapore’s fourth leader since its independence in 1965.

• India, the world’s largest democracy, has begun voting. Prime Minister Narendra Modi is seeking his third time as his party, the Hindu nationalist BJP, is aiming to expand its reach. Modi’s party has been criticized for anti-democratic crackdowns on opposition politicians and critical journalists. The BJP is heavily favored by polls, and its main rival the Indian National Congress, represented by Rahul Gandhi, lost badly in national elections in 2014 and again in 2019. India has 969 million registered voters, who will be heading to around one million polling stations and will be able to vote for over 2,600 political parties. Unemployment, economic development, and welfare programs top Indians’ top election concerns. Results are expected to be announced on June 4th. 

• Market Implications: The economic and geopolitical challenges for the South Korean economy (due to Kim John Un’s belligerence) are high and its market may continue facing headwinds. The Indian election could give a boost to its markets while the Malaysian and Japanese markets may positively surprise us in the next several months. We expect the Chinese market to continue having a good and decent return in the next few months due to exports and government programs.

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