Great power blocs
04 February 2022
Market Insight by Belal Mohammed Khan
Reading time: 3 minutes
Great power blocs are being formed more clearly and overtly with broad and far-reaching implications for investment portfolios.
The Atlantic Council has released another good piece on recent Russian activity in Belarus and the implications on the balance of power in the region.
- Great power blocs can lead to possible obstacles to the free movement of goods, services, and labor, thus pushing upward pressure on prices and inflation.
- Companies with large exposure to the opposing bloc may face harsh headwinds.
- Some countries may be more inclined to add gold to their reserve portfolios instead of more USD, EUR, GBP or JPY.
There is now a more clear division between Eastern European states as they align with Russia or NATO. Great power blocs are now more clearly being formed and being done overtly unlike what we have witnessed over the past several decades. The implications are broad, far-reaching, and long-term.
From a global macro and financial markets perspective, the implications are many including impact on prices and inflation. Generally, power blocs can lead to possible obstacles to the free movement of goods, services, and labor.
As gated globalization becomes increasingly entrenched, it has become vital to know and understand what allocations in portfolios have exposure to which geopolitical bloc and why. Companies in one geopolitical bloc may face growing headwinds in the other bloc as both sides rachet up the anti-other rhetoric and policies.
This is what we highlighted last quarter and in our 2022 outlook, The Great Transformation: Investing for 2022 and beyond.
From an investment strategy perspective, our call to go for “organic,” local, growth companies in the US and EU, should we believe help to create a more resilient portfolio. Growing political divisions are also supportive of gold price.
It may become increasingly illogical for the Russia-China bloc of countries to add USD, EUR, GBP, or JPY to their currency reserves; instead, such countries may be more inclined to add the CNY (a growing reserve currency) and add more gold. Gold holdings in reverse portfolios of several Russia-China bloc of nations have sharply increased already since 2016, we expect this to continue. For example, the World Gold Council data show sharp increases in gold reserves of Uzbekistan, Kazakhstan, and the Russian Federation (25.50 tonnes (t), 11.27t, and 6.2t, respectively).
We hold an overweight to gold in our model and discretionary portfolios.
Portfolio actions to consider include:
- Allocations that can help portfolio performance across asset classes include, in fixed-income inflation-linked bonds.
- In equities, greater exposure to quality and value factors, and a more transparent sector shift towards materials and financials.
- In commodities, we favor an allocation to broad commodity baskets and hold an overweight in critical precious metals, especially gold.
Important notice
The information provided herein constitutes marketing material, that may contain general information, and has been prepared by personnel in the GMG Investment Solutions SA or GMG Institutional Asset Management SA (collectively “GMG”) and is not based on a consideration of the prospect’s circumstances. This document reflects the sole opinion of GMG or any entity of the GMG Group and it may contains generic recommendation.
Non-Reliance: This document does not constitute a recommendation or consider the particular investment objectives, financial conditions, or needs of individual clients. Before acting on this material, you should consider whether it is suitable for your circumstances and, if necessary, seek professional advice. GMG is not soliciting any specific action based on this material it is solely intended for illustration purpose.
This document is not the result of a financial analysis and therefore is not subject to the “Directive on the Independence of Financial Research” of the Swiss Bankers Association.
This document is neither a prospectus as per article 652a or 1156 of the Swiss Code of Obligations, a listing prospectus according to the listing rules of the SIX Swiss Exchange or any other exchange or regulated trading facility in Switzerland, nor a simplified prospectus, key investor information document or prospectus as defined in the Swiss Federal Collective Investment Schemes Act. Any benchmarks/indices cited in this document are provided for information purposes only.
The accuracy, completeness or relevance of the information which has been drawn from external sources is not guaranteed although it is drawn from sources reasonably believed to be reliable. Subject to any applicable law, GMG shall not assume any liability in this respect.
Risk Disclosure: This document is of summary nature. The products referred to herein involve numerous risks (including, without limitations, credit risk, market risk, liquidity risk and currency risk). In respect of securities trading, please refer for more information on such risks to the risk disclosure brochure “Risks Involved in Trading Financial Instruments – November 2019”, which is available for free on the following website of the Swiss Bankers’ Association: www.swissbanking.org/en/home.
Material May Be Outdated: This material is produced as of a particular date. Accordingly, this material may have already been updated, modified, amended and/or supplemented by the time you receive or access it. GMG is under no obligation to notify you of such changes and you should discuss this material with your GMG relationship manager to ensure such material has not been updated, modified amended and/or supplemented. The market information displayed in this document is based on data at a given moment and may change from time to time. In addition, the views reflected herein may change without notice. No updates to this document are planned. In the event that the reader is unsure as to whether the facts in this document are up to date at the time of their proposed investment, then they should seek independent advice or contact their relationship manager at GMG.
Information Not for Further Dissemination: This document is confidential and should not be reproduced, published, or redistributed without the prior written consent of GMG.