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  • Writer's pictureRealFacts Editorial Team

Repercussions of Geopolitical Tensions


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Recently the world has witnessed escalating geopolitical tensions between Russia and Ukraine as well as between Israel and Iran, alongside conflicts in other regions which have increased concerns about global stability. The heightened conflicts have diverse impacts on both global and United States equity markets. Nathan Sheets, Citi’s Global Chief Economist, shared valuable insights on the repercussions of these geopolitical tensions during an interview on Bloomberg Markets: The Close. Sheets emphasized that he considers the key issue to be what implications these tensions have for the oil market. He noted that the oil market has effectively assessed the risks associated with these conflicts, highlighting his optimism that it has managed the Middle East stress relatively well. He discussed what he referred to as an "uncertainty premium". This concept is when markets tend to initially overreact to geopolitical shocks, followed by a subsequent normalization as the initial impact dissipates. In recent weeks this phenomenon has been witnessed in the price of oil.

 

Amid these concerns, investors have various options to hedge their investments in case the black swan does appear. A top suggestion from Citi Group for hedging is gold. In recent months, gold futures have skyrocketed, reaching their all-time highs of over $2,400, gaining over 14% this year, which has outperformed the S&P 500 by nearly 10% as of Monday. This significant increase is largely attributed to investors hedging against persistent inflation, but as Sheets suggests, there may also be a geopolitical aspect to the rise from investors hedging against heightened tensions.

 

Another trend emerging is the increased narrative of deglobalization which is attributed to the heightened conflicts across the world. Deglobalization refers to the process of reducing interdependence and integration between countries and regions, often through policies that prioritize national interests over global interconnectedness. Sheets stated, “We are seeing a pulling back and reprofiling of global flows of global economic activity away from China, and it's going into other places and other regions. Some of the beneficiaries of that have been India and perhaps other parts of Asia as well. Mexico has been a big winner and we're seeing some nearshoring in Mexico and reshoring in the United States.” Sheets went on to say that he holds a positive view regarding the medium-term prospects for regions and countries benefiting from the shift away from China and he foresees sustained and structural growth that will persist for several years. With deglobalization underway, investors should consider the potential long-term impacts this movement may have on the overall market and the individual companies that may be affected.

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