Great power blocs
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.
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