NATO 2.0 is disrupting markets worldwide, Eurozone investors should take note

07 July 2022
Newsletter by GMG Asset Management
Reading time: 4 minutes

The NATO Summit has concluded with one of the most extraordinary and divisive geopolitical developments in recent European and perhaps world history.

The 2022 Strategic Concept (SC) document released last month is a pendulum swing moment for NATO. After being described as ‘brain dead” by French President Macron in November of 2019, and the US President threatening to withdraw from NATO in 2018, this alliance has resurfaced, dramatically transformed.

“What we are currently experiencing is the brain death of NATO.”^[1]

A new NATO has emerged, NATO 2.0, with an apparent larger mission that seems to include the Asia-Pacific region and a more aggressive position on China, setting the stage for possible sharper geopolitical division. This new position and more aggressive posture will likely impact everything from trade to labor mobility and global investor capital flows.

The NATO Strategic Concept document (SC), issued approximately every ten years, is meant to clarify the purpose and ten-year plans for NATO. The 2022 document, however, is radically different from the 2010 Strategic Concepts. In the 2022 version, Russia and China are labeled hostile and adversarial.

Russia is mentioned 14 times in the 2022 SC document, and it’s done so negatively. However, in the 2010 SC, Russia was mentioned 13 times, mainly in a constructive manner, i.e., “NATO-Russia cooperation is of strategic importance as it contributes to creating a common space of peace, stability, and security. NATO poses no threat to Russia. On the contrary: we want to see a true strategic partnership between NATO and Russia, and we will act accordingly, with the expectation of reciprocity from Russia.” This year’s SC states, “The Russian Federation is the most significant and direct threat to Allies’ security and peace and stability in the Euro-Atlantic area.”

China was not once mentioned in the SC 2010. However, in the 2022 document, it is not only mentioned but referred to as a “strategic competitor” and that “The People’s Republic of China’s (PRC) stated ambitions and coercive policies challenge our interests, security, and values.”. The text also states, “The deepening strategic partnership between the People’s Republic of China and the Russian Federation and their mutually reinforcing attempts to undercut the rules-based international order run counter to our values and interests.”

Indeed, China has responded and has sternly warned NATO to stop the smearing campaign. Zhao Lijian, the Spokesperson for the Chinese Foreign Ministry, stated (translated), “NATO is a systemic challenge to world peace and stability. NATO claims to be a regional defensive organization, but in fact, it has been making advances into new areas and domains, launching wars across the world, and killing innocent civilians. China has also stated that it was firmly opposed to NATO’s warning about China’s threat and that NATO’s position is filled with a cold-war mentality and ideology. Furthermore, it is NATO’s eastward expansion that has provoked conflict. Regarding the inclusion of four Asian nations in this year’s NATO Summit, Chinese officials have stated that NATO is looking to expand its influence in the Asia – Pacific region and it should not seek to destabilize Asia and the world. Indeed, his year, for the first time in NATO history, Asian nations were invited and participated in the NATO Summit: Australia, New Zealand, Japan, and S. Korea.

Moreover, historically neutral countries of Finland and Sweden also joined, thus potentially posing a more significant threat to Russia if both join this military alliance. In turn, therefore further growing the global investor’s concern about regional peace and security.
From a financial market implication perspective, the implications are broad and likely long-lasting.

NATO has vowed to support Ukraine for “as long as it takes.” This confirmation of commitment dramatically increases the risks of Russia using its energy supply as a weapon more than it already has. There is now a greater risk of massive disruptions across European industry due to energy supply disruptions which Russia may be currently planning for, especially during the winter. Germany is most at risk.

Market Implications are broad. Global investors may need to reassess geopolitical and economic risks on the European continent. Such reassessment may lead to assigning greater risk to European assets, which would likely result in reducing allocation to such assets, negative for European bonds, stocks, and currency and instead such investor capital will flow to markets of more ideologically aligned countries.

We expect demand for energy assets will remain in high demand as EU nations and most other nations will look to ensure strategic energy reserves are as high as possible. This bodes well for the economies of major energy-exporting nations which have already been benefiting from higher energy prices. These markets have been the star performs this year (Kuwait +11%, UAE +9%, Qatar +6%, Saudi Arabia +3.5%, Indonesia +2.8%).

Beyond energy, agricultural prices should continue to find support given NATO’s commitments to Ukraine suggest there is no immediate solution or resolution on the horizon. Markets of agricultural commodity-exporting countries outside of the Euro area should continue to outperform, i.e. Brazil and Indonesia.

Regarding currencies, if global investor perception of risk is now being reconfigured, all European currencies, especially the most widely held European currency, are likely at risk. In the longer term, perhaps beyond the multiyear horizon, USD demand may also soften as the list of non-NATO aligned and unaligned nations grows. CNY, the Chinese currency, stock, and bond markets may be the largest beneficiary.

In conclusion, NATO 2.0 may accelerate geopolitical divisions and fragmentation, leading to the same outcome, greater divisions, and fragmentation in global investor capital flows.