The first decade of my career in financial markets was defined by central banks. Whatever they did or didn’t do made stocks and bonds go up and down.
To understand and predict what’d happen, you had to understand central banks and their monetary dynamics. This allowed me to predict the German housing bubble after the 2008 financial crisis, the inflation of 2021, the bond crash, two gold bull markets and plenty more.
But the last few months have come as a surprising change to that paradigm. There’s a new kid on the block. And this bully might be even bigger and stronger than central banks. It’s the government.
‘Geopolitical risk’ used to sound like one of those meaningless buzzwords. Salesmen and fund managers used it in their small print. It referred to isolated events, like 9/11 and mining royalty disputes in places like Mali.
But geopolitical risk didn’t sustainably define returns over time. Economists would’ve called it an ‘exogenous shock variable’. Something that hits you on the back of the head every now and then. You don’t see it coming — that’s the whole point.
Apart from wearing a helmet (made of gold) and a seatbelt (called a “stop loss”), what’s the point of focusing on geopolitical risk? You’d only cower yourself into taking on too little risk as you worry about the likes of North Korea and Houthis.
But all that has changed.
These days, geopolitical risk seems to be defining entire investment trends.
It’s a force that investors can either profit from or lose out to over time. But they can’t ignore it anymore.
Let’s look at some recent examples to see what I mean…
President elect Trump’s picks for his government’s leadership positions are wreaking havoc in the stock market each day.
Major pharma and biotech stocks took a serious hit over RFK Jr’s appointment to Health Secretary. The latest Kennedy may be asking corporate America some very awkward questions in coming years.
Green tech stocks crashed on Trump’s election. And went right on going after Trump chose a fracking services company CEO as his Energy Secretary. A clear signal that fossil fuels are in, green tech is out and Net Zero on the backburner.
European industrials were crunched because of Trump’s tariff threats. European green energy stocks doubly so.
It’s worth pointing out that Trump is only threatening to give Europe a taste of its own medicine on trade policy. The EU is a highly restrictive trade cartel. Whether Trump is trying to crack that nut for American export business, or genuinely wants to apply tariffs, is another question.
It’s not all bad news, of course. US energy companies rose. Defence stocks rallied too. Trump is demanding the Europeans pay for their own defence instead of relying on America’s defence spending in Europe. But it’s not like he’s planning to leave Europe to the Taliban…
The gold price got smashed since Trump’s election, although I’m not entirely sure why. One possible explanation is that Trump’s policies will spur inflation.
That only looks good for gold at first glance. It also means higher interest rates from the central bank, which are bad for gold. A politically motivated Federal Reserve is a lot more likely to tighten monetary policy on Trump than Harris. Especially if it causes a fiscal crisis — a Liz Truss moment.
Of course, that would be great for gold. Making the current correction an excellent buying opportunity. Especially if you know how to take the opportunity.
The crypto market has soared since Trump’s election. There’s even talk of him setting up a government bitcoin reserve fund. Which contrasts rather dramatically with President Biden selling down the strategic oil reserve.
It’s not just Trump, of course. Russia announced restrictions on enriched uranium exports to the US, sending the price soaring. Uranium stocks surged.
Azerbaijan is offering to sell rebranded Russian gas to Europe to skirt sanctions. The gas price is surprisingly low in Europe.
Russia’s president Putin is reportedly interested in using what’s left of the Nord Stream 2 pipeline to sell gas to Germany. If they side with him against Trump in upcoming negotiations over Ukraine, that is. Something Trump warned of at the UN in 2016.
In the US, the Federal Energy Regulatory Commission rejected a nuclear power purchasing deal which split the nuclear power sector. How, is fascinating…
Amazon had purchased a data centre next to a nuclear power plant and planned to buy an additional half a gigawatt of the plant’s power to run their Artificial Intelligence on. The deal would be ‘behind the metre’ and thereby off the grid. But the FERC rejected the application because it’d rob the local power network of too much juice.
This sent small modular reactor stocks skyrocketing. That might seem confusing at first. If nuclear can’t be paired with AI data centres, isn’t that bad?
But if AI data centres can’t secure a share of large-scale nuclear power for themselves, they’ll just have to buy their own nuclear power plant outright. And SMRs are their path to doing so.
Only in an energy system fouled up by governments do SMRs have a chance to succeed. But that’s looking like a safer bet, thanks to government meddling.
Even the issue of immigration is moving markets. In Australia, worries about a foreign student ban moved shares in property and education companies. That fear has since subsided. But the risk is still priced in.
An election is likely to mean an end of the nuclear power moratorium. What would that mean for Aussie uranium miners? Green energy stocks?
The list of politics moving markets goes on and on. And its length is the real point I’m making. Geopolitical risk is now driving stock market returns. This wasn’t in any textbook. We live in a truly bizarre world.
It took some investors years to figure out that central banks were defining markets since 2008. Just as you should’ve focused on central banks in 2008, you should be focused on geopolitics today. It’s a case of adapt or lose money without understanding why.
By the way, if you’re like me and have absolutely no faith in politicians, you might want to start thinking about which investments could benefit from geopolitical chaos. There aren’t many.
Regards,
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Nick Hubble,
Editor, Strategic Intelligence Australia
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