How competing superpowers can be an investor’s friend

How competing superpowers can be an investor’s friend

May 30, 2023

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Not since the fall of the Berlin Wall in the late 1980s has geopolitics occupied so much time and energy. From Eastern Europe to the Middle East and Asia, conflicts and tensions are multiplying in number and size.

What’s more obvious is this ominous trend is only set to continue as competition among countries ratchets up. For investors, this begs the question, can you make geopolitical competition a friend rather than a foe? The short answer is yes.

The fight for critical minerals – such as copper, lithium, nickel, cobalt, graphite, manganese, and silver – is one way investors can benefit from geopolitical tensions.Credit: Bloomberg

We’d all prefer a world where tension and competition between countries do not exist. Aside from the obvious benefits for humanity, markets tend to react unfavourably to uncertainty and relish long-term stability where companies can invest and plan for the future. However, this utopia does not yet exist, which means investors must consider their portfolio in this changing environment.

First, investors should look to build a robust portfolio core that comprises broad exposure to Australian and global equities, bonds and other assets. A diversified portfolio core will provide a solid foundation for investors to position the satellite components of their portfolio for a time of geopolitical uncertainty.

One of the most significant changes has been the evolution of cyberspace as a battlefield. Rather than fighting with tanks, rifles and missiles, nation-states are launching increasingly sophisticated cyberattacks to disrupt their adversaries. The target of this nefarious activity is not limited to other governments either, with businesses and individuals also in the firing line.

To meet this threat, Gartner estimates that annual spending on cybersecurity will hit $262 billion in 2026, with one estimate from McKinsey indicating that the current addressable market for cybersecurity companies sits somewhere between $1.5 trillion and $2 trillion – a staggering amount that reflects the growing number of online interactions and financial transactions, and the rapid increase in cyberattacks.

In this climate, global cybersecurity companies like Fortinet, Palo Alto Networks and CrowdStrike will benefit from the growing number and increasingly complex cyberattacks from which businesses and individuals are seeking to protect themselves.

The Middle East has long been a flashpoint for geopolitical tension, but the region is now entering a new period of instability. Iran is reported to have produced weapons-grade enriched uranium, a significant step on their path to nuclear weapons. In Israel, the recently installed Netanyahu government has committed to doing whatever it takes to prevent Iran from acquiring such weapons.

To date, we have seen escalating rhetoric from both sides, sabotage and proxy conflicts. If a direct hot war emerges between these two powers, investors should be alive to threat to global oil supply, and the likelihood of immediate upward pressure on oil prices. In an environment where oil prices are higher, Western energy supermajors like Chevron, ExxonMobil and Shell could see higher returns on their legacy projects, even as they make the transition to a net zero emissions economy.

Finally, few better examples of geopolitical competition exist than within critical minerals. Metals such as copper, lithium, nickel, cobalt, graphite, manganese, silver and rare earth elements are key components in the production of next-generation technologies that underpin batteries, energy generation, advanced computers, and electric vehicles.

Due to their importance, countries like Australia and the United States are feverishly trying to claw back the lead that China has built in the space. As a result, producers of these energy transition metals are expected to benefit from the growing demand, structurally constrained supply and support from national governments around the globe seeking reliable access to these resources of the future.

Ultimately, geopolitical tension is no reason for investors to rush for the exit. In fact, it might even be an opportunity for investors to make strategic competition a friend of a well-constructed portfolio by carefully selecting some growth exposures that are positioned to benefit from the long-term trend.

  • Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.

Cameron Gleeson is a senior investment strategist at Betashares.

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