Geopolitics? What geopolitics?

0:00Hey, listeners. For the holiday season, we're going to do an episode where we answer your questions. So send them to unhedged at ft.com.

0:34out for recently. Now, one argument here is that emerging market investors are somewhat better than developed market peers at figuring this stuff out, working out how it might affect portfolios. But today on the show, we're asking, why do investors miss this stuff? They always say geopolitics are a risk, but they always miss these things. Does it really matter? Not in like real life, of course, all this stuff matters in real life, but in market terms. This is Unhedged, of the Markets and Finance podcast from the Financial Times. I'm Pushkin. I'm Katie Martin, a baker of mince pies and a markets columnist here at rather festive FT Towers.

1:13We've got a nice tree in reception. It's a Christmas party tonight. I'm joined down the line by the very lovely Aidan Ryter, who's the guy who does all the hard work on the Unhedged newsletter so that his boss doesn't have to. Aidan, do you know what a mince pie is? It's a pie with really weird chopped up fruit in it. I mean, it's like meat-like fruit. Is that right? meat like fruit. Well, I'm not sure what fruit you're thinking of, but the category error that Americans always make in relation to mince pies, which are things that we eat at Christmas time only, they're small little mince pies, small little pies, is that they don't have mince in them.

1:52They don't contain meat at all. They contain like dried fruit and some nuts. Exactly. Meat like fruit, right? Dense and... And booze. Meat like fruit. if you are in London at some point at Christmas time, I will give you one of my mince pies. I make lots of them every year. Thank you. I can't wait. But we digress. So geopolitics, do markets care about geopolitics? Like there's just been lots of things this year that you look around, you look at the situation revolving around Israel, for example, and you come to the conclusion that like, no, not really. I mean, am I wrong? I mean, markets care about geopolitics in some specific cases.

2:31And we should definitely say that within individual countries, indexes and their companies, they definitely matter a lot. But in this US-dominated market, where everybody's focusing specifically on companies in the US and companies that operate abroad that are based in the US, oftentimes the market is able to shrug them off. So a few years ago, if you'd said to me that what was happening in Gaza, Lebanon, with the involvement of Iran, that is like a slam dunk reason to get out of risky bets and to run into havens. And this year, it's just really not happened. Why do you think that's the case? Well, I'll say on Israel, yes and no, it matters.

3:08I mean, Israel already has a volatile stock market. And there are some really strange, counterintuitive things that have made the stock market rise in the past couple months, as opposed to just uniformly fall while the war has been going on. And that is more about strange economic policy that coincides with wartime. Also, the fact that the war is not being fought within main Israeli commercial corridors, for lack of a better term. But anyway, yeah, it's interesting. I think the place we typically see geopolitics playing out in the broader market is in oil. But especially in the past couple of years, investors have learned to really shrug off what's happening in the Middle East and Russia because they've learned essentially from hard experience that the geopolitics doesn't always matter.

3:49It's just when you have the chance of something becoming even worse that the market tends to take it into account. So, for example, we wrote and we spoke about the other day about oil. The oil market has been mostly calm despite crazy things going on in Israel and now in Syria. And it's really only jumped when it seemed like Israel and Iran were going to get into a larger conflagration that could pull the entire Middle East in. But for the most part, investors have shrugged it off and they've shrugged off Syria too, right? I think the oil market moved 1 % the day that Assad regime was toppled.

4:21I mean, there's a few sort of structural reasons related to that, right? So, like, even Iran is not as big of a player in the oil market as it used to be. And the fact is that, you know, as usual, all roads lead to the U.S. What matters for the U.S. economy matters for the global economy and therefore for global markets. And actually, U.S. is pretty good at pumping its own oil these days. So, you know, because of shale, you know, it's much better at kind of taking up the slack if supply gets curtailed from anywhere else in the world. So it's just not as meaningful a macro issue that it was, you know, five or 10 years ago.

4:55I'd say on oil, some things do matter. I mean, you know, OPEC could matter a lot. And so that's the point, right? If there were a larger conflagration in the Middle East and pulled in a lot more producers, that's when you see things start to rumble. But each individual producer is just not big enough to completely upend the market. Yeah, we're not at the point where OPEC, which effectively sets oil prices for a lot of different countries, we're not at the point where they are involved. But it really strikes me that people's geopolitical antennae are a bit off at the moment. So nobody saw the South Korean martial law thing coming, as far as I'm aware.

5:30Normally, you get a kind of big flare-up like that, and I'm getting notes from geopolitical strategists for weeks in advance saying this is a thing that investors should be watching out for. This time, basically nothing. What was the market reaction to all that? The KOSPI index, which is Korea's main index, was only down 3%. And it's still trading a little down in the ensuing days. But that's because they haven't actually decided what they're doing with Yoon Seok-yeol. Oh, with the president, yeah. I feel like once they actually decide what they're going to do with him and whether he's impeached, you might just have it rally back to where it was.

6:01And I don't know if this is an example of markets having their antenna off or really just having their antenna on. Korea and the office of the presidency in Korea is a famously turbo post. A lot of past presidents have been tried for corruption, have come into conflict with opposition parties. So at some point, and some people I spoke with said, Korean investors just know to expect these things even when it's unexpected. So it could be, yeah, the market doesn't care if the market's off. Or actually, their antenna's on. They really understand, especially in the case of Korea or in the oil market, that unless there's a certain set of really bad outcomes, most things they can weather.

6:36And also Korea is a strange example in that the market hasn't been doing great in the past year anyway. So it had already fallen a lot based on some of the political outcomes going on already. So it didn't have much further to fall. Yeah, maybe. I mean, I've heard some talk among sort of asset managers that South Korea is the next Japan. You know, it's going to have a big resurgence in its stock market. This won't help that narrative. But thinking about even more recent geopolitical flare-ups, for want of a better word, than South Korea, again, nobody had fall of the Assad dictatorship in Syria on their cards for this year at all.

7:14So far, again, markets are not really biting on this. Would you imagine that's going to remain the case? I think, again, this seems to be fine if its conflict is just restrained to Syria. Syria has not been a big market player for a long time, or if ever. But again, if this could lead to larger conflagration in the Middle East, you might get some movement in the markets. If Israel and Syria start clashing over the buffer zone, if certain powers come into Syria that the market doesn't seem to approve of, certain parties, rebel groups come into coalition, then you could get something. But again, it doesn't seem like it's going to be largely exiting Syria's borders, at least for the time being.

7:53And that's what the market seems to care. But you have been following very closely what's been happening in France. While it's not large geopolitics, it is really important to the broader EU. Has the market reacted at all in France or Romania, for that matter? No, exactly. We have had big news events in France in terms of like the government has fallen there again. They're still struggling to put together a budget. One of the reasons why I think that hasn't sort of metastasized, if you like, into a bigger Eurozone debt crisis, which it would have done if this had happened 10 years ago, I can assure you, is that like the European Central Bank has seen this movie before.

8:29It knows how to put out fires. And yes, you know, a proper French debt crisis would be an enormous fire to put out. But it's really notable that, you know, other parts of the Eurozone are just they're just sort of sitting back and watching what's happening to France. and what happens in France stays in France. And it's hard to imagine why that would sort of morph into something different. But again, yeah, you do have a pushback to Russia going on in Georgia. You have a pushback to Russia going on in Romania in the form of they've annulled the presidential election. So again, all of these things so far are things that markets don't care about.

9:05And we're not here to talk about really what markets don't care about. What I'm wondering is from your point of view, what are markets missing? What are the geopolitical flashpoints that really could matter here? Of course, things change in the Middle East rapidly. Who knows? I mean, to your point, with Moldova, with Georgia, with Romania, and with France to some extent, we are seeing somewhat of a bigger gap between EU and Russia, right? A lot of these countries are turning away from Russia, essentially criticizing or choosing the politics that do not align with Putin. Meanwhile, here in the US, we have Donald Trump coming in who has been known to be sympathetic towards Putin on various things.

9:43So at least when it comes to the tariff war, to the extent that geopolitical alignment matters and how Donald Trump will actually impose tariffs on other countries, one thing the market could be missing. And again, it's so hard because we don't know what Trump will do. But if Putin is going to really begin lambasting the EU even more, if Trump takes that as a signal to hit EU with even bigger tariffs than he's already planning, that could be something. But again, we just don't really know how Putin, Trump and tariffs will play out in the coming months. Yeah, I think tariff policy is where geopolitics are going to turn into something that's a bit more about cold, hard cash.

10:18And so, yeah, as you say, as we get this policy fleshed out, his relationships, Donald Trump's relationships and the U.S.'s relationships will matter more. But on your point about Putin, my pet theory is that the thing that investors are missing right now in terms of geopolitical risks for 2025, I think people are missing Ukraine. So everybody hates Europe, right? You know, the big investment theme for 2025 is all about, you know, American exceptionalism. Buy America, buy, buy, buy. You know, you don't need to worry about anything else in the world. You know, there's no positive story to be told about Europe.

10:55I would argue that the possibility, even if it's only a slim possibility, but the possibility of a breakthrough towards peace in Ukraine next year is something that could be very positive for European markets, which are very under-owned as an asset class by global investors. And a little bit of good news on Ukraine could go a really long way in terms of firing European markets up. So, you know, it's quite important to remember that risk cuts two ways for investors, right? There's the risk that something that you own could fall in value really quickly because of something horrible that you hadn't expected.

11:29But risk can also mean something good happens to an asset class that you don't own enough of and that you miss out on it. And I think Ukraine is exactly that type of risk. It's a massive upside risk to European markets that almost nobody is talking about. I don't know. Do you think I'm being kind of pie in the sky here? No, not necessarily. But I'm curious what you think is the flow through mechanism from Ukraine to broader sentiment and actual earnings growth in the broader EU. So, again, this is pretty long term, but it's the reconstruction trade. There's a lot of Ukraine to rebuild. And, you know, you can't go through the practical steps of rebuilding Ukraine unless you have durable peace.

12:09So like a ceasefire wouldn't cut it. It would have to be a peace deal. And no sensible, right-minded person wants Ukraine to just take peace at any cost. This is a matter for Ukraine. It's a sovereign matter. We don't want them to be bumped into a deal that they don't want. But I think just the prospect of peace would, I think, just take a black cloud off from Europe. It's one of the things that's been holding Europe back for years in relation to the US. I don't think that on day one of the sniff of the start of talks about talks about talks that might lead to peace, you know, Europe is not going to turn the taps back on to allow Russian gas back into European industry, much as it needs it in some ways.

12:55So you're not going to have a sudden kind of collapse in energy prices in Europe. But I do think you just take away that dent to sentiment. You take away that cloud over European markets. And at some point further down the line, you're looking at a reconstruction trade. Now, the caveat to all this is that, you know, God forbid, stuff could get worse in Ukraine before it gets better. There's absolutely no guarantee that anything will come through of a positive sense in 2025 or even 2026. But I think we are in a situation where people just hate European markets so much that this is a potentially big catalyst for a change in direction that I think is just worth having in the back of your mind.

13:35Yeah. And to the extent that we feel that markets have their antenna on as opposed to antenna off, right, they've learned to weather these things. We need to see a lot more progress, to your point, on Ukraine because they've learned that not to just accept the first sign of a deal as the actual culmination of a deal. Yeah. But, you know, I think there are times where geopolitics do really matter to markets. I think Mexico in the past year is a great example. I was going to ask you about Mexico. So Mexico has got some real kind of statecraft to do here, right? It's got a really difficult diplomatic situation with its northern neighbor.

14:08Absolutely. It's going to be a really difficult thing for it to navigate. How do you think that's going to play out for Mexican markets? You know, the NAFTA piece, so the North America Free Trade Act, and Trump has already said he's going to slap Mexico with tariffs, that will play out. I actually think the interestingly more important thing in Mexico was the election earlier this year. So since the election, the market has lost 10 % to 25%. I think it's 25 % USD, 10 % in Mexican pesos. That's a lot. And it's because of a controversial judicial reform that was going to be pushed by the ruling party, which got such a large majority, they were able to actually push it through.

14:46This happened in September. It was a couple months of legislating. but essentially making judicial appointments all elected as opposed to appointed. And the reason this tanked the market is that so many Mexican firms really are U.S.-linked, whether it's a U.S. firm operating in Mexico or some form of manufacturing and or operating agreement between U.S. and Mexican manufacturers. And the concern is with elected officials who are now more popularly elected and there's theoretically more money sloshing around judicial appointments, they will not rule favorably or at least equitably between the United States and Mexico.

15:19per other legal arrangements between the two countries. So that is completely tanked. Originally, just it tanked on the idea that would happen. And then it felt just a little bit more after it actually happened because the market had learned to expect it after the election. At the end of the day, that's because it's fundamentally changed the environment under which large American businesses were going to be able to operate in Mexico. And that's an example of something that really matters, right? If you're completely changing the business environment in a way that's going to disadvantage your largest businesses, your stock market's probably going to crash.

15:50It's not going to like it much. I think the other geopolitical risk that people have taken their eyes off a little bit, I don't know if you remember like a month or so ago, we had Nikolai Tangen from the Norwegian Oil Fund on this very podcast. And he was saying, similarly, there's not enough people still watching Taiwan. Absolutely. Taiwan is absolutely central to the global flow of microchips. And without a global flow of microchips, then you certainly don't have the kind of big shiny US tech stocks performing as well as they're performing now. And so it's really worth keeping an eye on how like on the relations between China and the US, between both of those and Taiwan, because that's a potential flashpoint.

16:33So, yeah, I guess my sense is Taiwan is a potential negative shock that is really worth watching carefully. Ukraine is a potential positive shock that's really worth watching carefully. And I think some other kind of economies that are going to get snarled up in the tariff war, you know, notably Mexico, possibly Canada and Europe. This is all going to get quite crunchy next year. Yeah. And I think just to point out how much we really don't pay enough attention to Taiwan, or at least the market has not to this point. This past summer, there was some conflict between the Philippines and China in the South China Sea right by Taiwan, just a couple hundred miles.

17:10And to many people watching it very closely, this was the closest we've come to another world war or a massive war between the US and China in years because the US and the Philippines have a military agreement. But the market did not care at all. And that's something that could flow into Taiwan. Like Fulana and NVIDIA, yeah. Fully did not care. And a lot of NVIDIA and a lot of ASML have been working really hard to get their supply chains out of China or try to find ways to comply with bans on China. But they haven't done a lot to get out of Taiwan. or at least, you know, it's not talked a lot about in the market.

17:43So the moral of the story, listeners, is geopolitics really don't matter at all until they really do. I hope you find that to be useful advice for your portfolio and indeed for your life. We are going to be back in a sec with Long Short.

18:06Okie doke, it's time for Long Short, that part of the show where we go long a thing we love, short a thing we hate. Aidan, what you got? I am long scarves. For years I said, scarves are not for me. This is a very pedantic piece of clothing. I don't need this. My neck can be cold. I started wearing scarves. Lovely. Just a nice way to exist in New York City where it's windy and keep your neck warm. So I drop all my... You were long, I think it was like knitwear. Oh, yeah. Months ago. I'm turning into an old man, I guess. I don't know. I'm turning into Rob, right? I want to wear like cozy scarves and ties.

18:45You are a long way off being as old as Rob. Don't you worry. I am short Crap Santa. Basically... Crap Santa? It's like a staple of the British news cycle that every year coming up to Christmas time, you have lots of stories about kids who are taken to some sort of Santa land experience by their parents and it's crap. It turns out just to be like a sports hall with a bit of tinsel in it and like a rubbish Santa. There's a real dearth of crap Santa stories this year and I'm really missing them. You enjoy the sadness of children around Christmas? I enjoy the sadness of children. the best that I've seen is apparently there's hardly any snow in Finland so little children that are lucky enough to be taken all the way to Lapland to see Father Christmas are finding that it's just like rainy.

19:34Oh that's so sad So that's a bit rubbish. I feel like we need more crap Santa experiences so if you've had a crap Santa experience please do feel free to get in touch with us unhedged at ft.com we would like to know all about it but But that's it for now. We are going to be back in your feed on Thursday. So listen up then.

19:59Unhedged is produced by Jake Harper and edited by Brian Erstad. Our executive producer is Jacob Goldstein. We had additional help from Topher Forges. Cheryl Brumley is the FT's Global Head of Audio. Special thanks to Laura Clark, Alistair Mackey, Greta Cohn and Natalie Sadler. FT Premium subscribers can get the Unhedged newsletter for free. A 30-day free trial is available to everyone else. Just go to ft.com slash unhedged offer. I'm Katie Martin. Thanks for listening.