To begin this week’s newsletter, we examine the slowdown of China’s economy, including the policy responses that Beijing has initiated, alongside the surprising growth and robustness of the Japanese economy. Then, we touch on small-cap stocks, which have performed unusually well in recent days compared to their large-cap peers. We then move on to a discussion of the recent election in Iran alongside upcoming elections in Venezuela, and what both developments mean for the countries and their regions. We end this week’s newsletter by looking at how the conflict in Ukraine has reached well beyond the bounds of eastern Europe.

China and Japan: Inverse Economic Trajectories

Chip stocks tumble on fears of China tech curbs, Trump’s Taiwan remarks

Nikkei

Five takeaways from China plenum’s economic blueprint

Wataru Suzuki, Nikkei

Japan’s exports grew for seventh straight month in June

Nancy Zheng, Nikkei

Japan Inc. shows signs of faster rejuvenation

Yukiko Une, Nikkei

China and Japan are navigating distinct economic trajectories marked by different challenges and policy responses. In China, the government’s recent long-term policy blueprint from the third plenum emphasizes strengthening the industrial sector, achieving technological self-sufficiency, and reforming local government finances by 2029. However, the document notably lacks specific measures to boost consumer demand, a critical issue given the weak domestic consumption and overcapacity that strain trade relations with the US and other regions. This cautious approach, coupled with concerns over tighter US export restrictions on chip technology to China, has led to a less-than-enthusiastic reaction from the market and a drop in the onshore yuan. The Chinese strategy for improving its economic outlook remains centered on state-owned enterprises and high-tech manufacturing, reflecting a continued commitment to controlled, long-term growth rather than immediate economic stimulation.

In contrast, Japan’s economic trajectory shows signs of rejuvenation through both increased exports and significant changes in the corporate landscape. In June, Japan’s exports rose for the seventh consecutive month, driven by strong demand for semiconductor equipment, despite a decrease in export volume due to higher prices from a weaker yen. The first half of 2024 saw a reduced trade deficit, indicating a positive shift. Moreover, Japan experienced a surge in new business formations in 2023, with over 140,000 companies established, marking a nearly 10% increase from the previous year. Government initiatives, such as expanded tax breaks and increased loan caps for startups, have supported this growth. Despite the rise in corporate closures and bankruptcies as COVID-19 support ended, these dynamics suggest a healthier market metabolism, with a more competitive and resilient Japanese economic environment emerging.

The Small-Cap Comeback?

Riskiest Stocks Begin an Epic Rotation With Rate Cuts in Sight 

Esha Dey, Bloomberg

The seismic small-caps snap-back

Robin Wigglesworth, Financial Times

A Stock-Market Rotation of Historic Proportions Is Taking Shape 

Karen Langley, The Wall Street Journal

Small-cap stocks, which have historically underperformed compared to large-cap stocks for over a decade, have begun to show signs of a turnaround. Small-caps in the Russell 2000 are up 9% since the beginning of July, significantly outpacing large-cap stocks that have suffered recent losses. Experts point out a number of potential reasons for this turnaround: First, with inflation appearing to near the Fed’s target 2% rate, anticipations of a rate cut have boosted sentiment regarding small-caps (small firms often benefit more from rate cuts because they have heavier borrowing costs). Second, with big names (Alphabet and Tesla, for example) showing disappointing earnings, investors may be more willing to rotate their funds out of these large-cap stocks and into smaller firms. The potential return of Donald Trump to the presidency also has some investors hoping for a period of tax cuts and less regulation. Still, analysts are divided on whether this rally can continue, worrying that it may only be a temporary surge. A potential economic slowdown or increased volatility could hinder small-cap performance. In the meantime, analysts advise prudent investors to watch upcoming earnings from both large- and small-cap companies with a focus on high-quality stocks.

Iran’s Recent Election; Venezuela’s Upcoming Election

Edmundo González: The Retiree Who Could Take Down Venezuela’s Dictator

Marian Blasberg, Spiegel International

Will Maduro Hold on to Power in Venezuela’s 2024 Election?

Shannon K. O’Neal & Julia Huesa, Council on Foreign Relations

Why Iran’s New President Won’t Change His Country

Mohammad Ayatollahi Tabaar, Foreign Affairs

Can Pezeshkian fix Iran’s relations with the West?

Dr. Hamidreza Azizi, European Leadership Network

The recent presidential election in Iran and the impending Venezuelan presidential election on July 28th, are both characterized by large swathes of the public wanting change and increased freedoms. In Iran’s case, the election has already been decided with Masoud Pezeshkian winning the presidency with surprising support, despite being viewed as a reformist candidate and former critic of the morality police. However, his presidency is unlikely to bring significant change due to his loyalty to Supreme Leader Ali Khamenei, who maintains control over the country’s power structures, including the Iranian Revolutionary Guard (IRGC) and the judiciary. Meanwhile, Venezuela’s race features 10 candidates but only the incumbent Nicolas Maduro, and opposition candidate and former ambassador Edmundo González are viewed as serious contenders. If elections were to be free and fair, it is expected that Gonzalez, per current polls, would win by 20 to 30 percentage points over Maduro. Under Maduro’s watch (2013-Present), Venezuela’s gross domestic product (GDP) has contracted by three-quarters, more than 80% of Venezuelans live in poverty, and roughly a fifth of the population Maduro inherited has since fled the country creating one of the largest displacement crises in the world. Many Venezuelans have decided to vote against Maduro in the past with their feet, especially after blatant electoral fraud was committed by Maduro in 2018. In Iran, voter turnout was historically low, with only 40% participating in the first round and 49% in the second, reflecting public skepticism there as well.

There are significant expectation gaps in terms of the changes that could be expected from Masoud Pezeshkian’s tenure and from Edmundo Gonzalez if elected. Pezeshkian, constrained by the Supreme Leader and other government institutions, is likely to pursue a modest nuclear deal with the US, de-escalation of tensions with the West, and sanctions relief to ease Iranian hardships. However, internal challenges, such as corrupt networks benefiting from the status quo and the potential reemergence of Donald Trump, could undermine these efforts. Consequently, Iran’s core political, economic, and regional policies are expected to largely remain unchanged. In Venezuela, Gonzalez, who was supposed to be a placeholder candidate for the opposition after the popular leader of the opposition Maria Corina Machado and her hand-picked candidate were barred from running, has since become the primary opposition candidate carrying forth Machado’s message that focused on increasing political freedoms, releasing political prisoners, and privatizing businesses nationalized under Chavez and Maduro. If Gonzalez is elected, significant change can be expected, with sanction relief, increased foreign direct investment (FDI) flows, and international financing likely on top of increased personal freedoms for Venezuelans. However, Maduro’s willingness to permit a free process remains uncertain; a Maduro victory could lead to a further exodus of Venezuelans abroad and increased international isolation for Caracas.

Ukraine as a Globalized Conflict

Whose Terms Will Set a Peace Deal in Ukraine? 

Eugene Chausovsky, Foreign Policy

Mysterious Russia-linked buyers amass LNG ‘dark fleet’ 

Shotaro Tani & Oliver Telling, Financial Times

Korean tensions flare as Seoul, Pyongyang take opposing sides on Ukraine

Steven Borowiec, Nikkei

As the war in Ukraine continues, the global nature of this conflict is on full display. For instance, two competing visions for peace, Ukrainian and Russian, have been floated on the global stage. Ukrainian President Volodymyr Zelensky promoted his 10-point peace plan to leaders and representatives from over 90 countries in Switzerland, which calls for ensuring Ukrainian grain exports, restoring Ukrainian energy infrastructure, and releasing and returning prisoners of war and children, among other points. On the opposite side, Vladimir Putin’s ceasefire offer (announced at a gathering of Russian ambassadors at the Kremlin, a starkly different setting) depended on Ukraine dropping its NATO ambitions and withdrawing from the four territories Russia illegally annexed following its full-scale invasion beginning in February 2022. Analysts believe that neither of these visions reflects the reality on the ground, as many agree the war has entered a period of stalemate. Russia’s manpower provides a military advantage, but Ukraine’s backing from the West gives it an edge economically. 

But the war is not only playing out on the battlefield and diplomatic gatherings. Russia, which has been heavily sanctioned by the West, is coming up with strategies to evade these sanctions. Mysterious buyers with suspected Russian links are rapidly buying LNG tankers, which are often registered in the UAE with opaque ownership structures. This increased demand for older vessels signals that Russia is trying to continue exporting LNG despite potential future sanctions, but also raises concerns about safety and environmental risks as these vessels are more prone to accidents and spills. Additionally, the war’s effects have even reached the Korean peninsula. North Korea and Russia have recently upgraded their partnership, with North Korea supplying weapons while Russia is suspected to be helping develop the North’s nuclear program. The development has worried South Korea and the US, as the North may be emboldened to attack the South with Russia’s backing. Meanwhile, South Korea, having provided nonlethal aid to Ukraine such as mine-clearing devices, is reconsidering its refusal to send weapons to Ukraine. As both sides strengthen their alliances, it is evident that the Ukraine war has effectively raised tensions in an already fraught region well beyond the bounds of Eastern Europe.