As fundamental investors, we are pretty surprised that the current geopolitical conflicts both in the Middle East and also the silent up-roaring tensions in Ukraine vis-à-vis Russia and the West have been put on the backburner by market participants.

Jordan Portelli

Historically, such geopolitical tensions usually have their toll on markets, but surprisingly this time round it seems that investors are more into other themes or macro-economic matters.

“Current geopolitical tensions carry significant implications. Russia has warned the West about its continued support for Ukraine, which could have direct consequences. Indirectly, rising tensions in the Middle East could lead to economic repercussions, particularly through increased energy prices, which would impact the global economy.”

Throughout 2024 market participants focused more on the interest rate trajectory dictated by Central Banks, the sanity of the global economy and whether the AI hype will persist.

Indeed, markets continue to monitor and price expectations on the next moves by major central banks, while the AI theme and specific macro data points such as growth figures and unemployment rates remain in check as very sensitive points for market performance and volatility.

This was witnessed in the first week of August when significant volatility black-shadowed the robust performance markets had achieved to date.

Both Democrats and Republicans have adopted a protectionist stance

Looking at the U.S. elections, to date, aside from a few statements from both candidates which have affected more specific sectors, markets have shown little interest. Factually speaking Trump’s comments specifically on Taiwan and that it should pay for its defence had sparked a sell-off in the semiconductor sector. It must be remembered that Taiwan is a chipmaking hub with major clients being Nvidia and Apple amongst others, and thus it is a crucial source for the tech industry.

 As we move closer to the election date, this is when the market will start being more attentive to the proposed policies by both candidates, and this is where sectorial market performance will diverge, but also the US dollar. There are some pretty obvious outcomes depending on the election results.

We experienced Trump way back in 2018 and we are very much aware of his unpredictable statements and actions. So, a Trump victory will bring volatility but it will also create many pockets of opportunities. Presumably, the trade balance could initially improve as a result of the trade policies/trade tariffs which Trump will possibly implement on the premise of ‘America first’.

Such protectionism might impact the US with higher inflation compared to other countries in the short-term and this might hinge on the actions that the Federal Reserve would want to deliver.

In reality, both Democrats and Republicans have adopted a protectionist stance in recent years, and this is more of a populist stance. However, as said, the former President is suggesting a 10% import tariff as a baseline – rising to 60% for Chinese goods, which is markedly higher than what his Democratic rivals have proposed.

This is where the 2018-2019 déjà vu kicks in; Trump and his unpredictable actions. Moreover, major changes to legal immigration would also have implications, as the US labour supply will squeeze posing upward pressures on wage growth.

Together, these proposed policies suggest a negative supply shock, putting upward pressure on inflation, while the imposed tariffs on China will inevitably dampen sentiment on selective Asian markets. However, opportunities will still be in sight with India being seen as one of the net beneficiaries of increased China tariffs as a sourcing alternative to Chinese goods.

Given a seemingly tight race with the risk of a situation in which the House and the Senate might be controlled by different parties, it would

be wise to play the neutral trade. Focusing on neutral trades, playing financials, not necessarily with banks, healthcare and the energy sector, should be seen as risk-neutral trades.

Undoubtedly, markets have become much more sensitive, and the upcoming U.S. elections will be surely on the radar for market participants in the coming days. However, sensitivity triggers volatility, the latter creates opportunities and this is where investors should be selective and take the plunge to invest.

This article was first published in The Corporate Times