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Navigating geopolitics in an uncertain world

PIMCO discusses all things geopolitical
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As quickly as the world came out of the pandemic, it was faced with yet another black swan event that caused markets to capitulate, and left supply chains in disarray. The fallout from the war in Ukraine is causing a food, commodity and fuel crisis which has given way to higher prices and a sharp rise in inflation.

In a world of rising inflation, heightened volatility caused by numerous geopolitical events, disruptions to supply chains and a rotation back to value and earnings, what opportunities can be found among the negative headlines? PIMCO’s New York-based Libby Cantrill addressed these key questions at the Morningstar Investment Conference. Cantrill is the managing director of PIMCO’s portfolio management group where she analyses policy and political risk for the firm’s investment committee.

Without being political, Cantrill tells it how it is, and describes the current situation in the US and what’s to come.

  • “Things here in the US are bumpy. The US media and public are very negative on the Biden administration but it’s fair to say that the first 18 months have been a tale of two administrations. The Biden administration started well, with great economic indicators for the FY. The unemployment rate is at historically low levels, real GDP growth is higher than in other developed countries, and child poverty decreased significantly. Also, Biden was able to able to pass and sign an infrastructure bill that other Presidents failed to do. It was quite a lot of good,” says Cantrill.

    But of course, the last six to nine months has seen core inflation soar, to levels that might be a little bit more persistent than anticipated. And now the Government is in crisis mode having met with a central banker to discuss. This isn’t just on Biden’s shoulders: before he came to power, Congress had approved US$3 trillion in stimulus, and US$5 trillion was the final stimulus figure. Looking at the chart below, it’s fairly obvious to see that the countries that released stimulus, New Zealand, Canada and Australia, all saw a rise in core prices. There is a correlation between those that stimulated and those that didn’t. Of course, it’s not the only reason; supply-chain disruptions and the Ukraine war are also to blame.

    Interestingly though, voters have noticed the rise in inflation and have squarely laid the blame (and also, for bad handling of both the economy and COVID) on Biden. The chart below shows the tale of two administrations. “The first eight months of the Biden administration saw positive net approval ratings but that was then followed by higher disapproval ratings after the botched withdrawal of troops in Afghanistan, and the President’s approval ratings drifted to poor. We have an incredibly divided country and a divided Democratic party. The division and infighting have slowed down Biden’s legislative traction, and as a result, have been a big headwind,” says Cantrill.

    President Biden came into office vowing to “unite the country,” but that hasn’t been the case. It’s not surprising that he hasn’t; Biden did not have the majority in Congress to do anything, and Cantrill says this continues to be the limiting factor of his tenure. For example, the Climate Infrastructure bill, originally set at US$4.065 trillion has been scaled back to US$1.85 trillion. This shows how fragile the US is at the moment.

    However, Cantrill says, “the China competition bill is the closest thing to industrial policy the US has seen for decades, and it has been signed and will go into law. It’s primarily focused on semiconductor manufacturing in the US. This has been a pillar of Biden’s foreign policy, to shore-up domestic strength and ensure that the US is competing with a position of strength.”

    There are similarities between Trump and Biden, and that is their views on China. Biden is taking a multilateral approach with the Quad, Australia and Japan, whereas Trump went solo. Bringing allies to help and isolate China both politically and economically is a lot more effective, Cantrill says. A good example is how the US responded to the crisis in Ukraine with its most sweeping sanctions ever, but implemented mostly in lock-step with its allies.

    “The US has managed the Ukraine situation very well. They knew Russia was going to invade Ukraine and as a result, they weaponised sanctions against Russia. They have never put it on a country so big and so integrated into the global economy. It was unprecedented. And it’s working, with allies helping strengthen NATO. It has been extremely successful. Russia is the most sanctioned country in the world,” says Cantrill.

    Cantrill comments, “The US response has sent a message to other countries (read, China) about the ramifications of such actions. The Biden message is that the US won’t send troops to Ukraine. Biden is taking a similarly hardline approach to China as that of Trump: if the Chinese are found to be supporting Russia militarily, then Chinese sanctions will be aimed at banks and other sectors.”

    The Biden administration faces some pretty significant headwinds and low approval ratings have translated into losses in both Houses, in the past. But it’s too early to say whether the Republicans can take back the Senate: it depends on the candidates selected for the Democrats. The other issue is that Trumpism is alive and well. When saying that, Cantrill doesn’t mean Trump himself; she says the chance of Trump regaining the Presidency “isn’t resonating well” with Republicans, but she does feel that an America-first victory is very possible. Cantrill says, “Trumpism will outlive President Trump.”

    All in all, the Biden Administration has a bit of work to do, but it has responded to the crisis in Ukraine with the most sweeping sanctions ever and has done so in lockstep with its allies, and that must be commended, she says. Cantrill ends by saying, “There is one more bullet left in the Biden arsenal that they can still deploy. And that is the possibility, that if the Chinese are found to be supporting Russia militarily, sanctions on Chinese banks and other sectors will be deployed.”




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