Thematic opportunities in a new regime

Last year ushered in a new investing regime, driven by three key global events, says Newton macro and geopolitical analyst Richard Bullock, and while creating volatility, he believes these events have also generated investment opportunities.

Three dramatic events occurred in 2022 that marked how the world has moved to a new regime, says Newton macro and geopolitical analyst Richard Bullock. The result has been volatility in markets and economies in 2023, but Bullock believes these events have also generated thematic opportunities for investors.

Bullock says it has been clear for some time we are leaving behind an old regime and entering a new one spanning multiple domains, including demographics, the role of government, energy transition, globalisation, and geopolitics.

“I think it is no exaggeration to say 2022 was the year that formerly catalysed the shift from the old regime to the new,” he says.

Catalysts

According to Bullock, who is part of Newton’s fixed income team, this regime shift was marked by three significant events. The first was Russia’s invasion of Ukraine which was the first time in more than 75 years a great European power had invaded a neighbouring country. This, Bullock adds, has put ‘hot’ wars and great power conflict back on the geopolitical agenda.

Second, 2022 was the first year since 1961 that China’s population officially declined¹. Bullock says this has set the stage for China’s labour force to fall by about 200 million people by mid-century² which will likely have a significant impact on the global labour force.

Finally, Bullock notes that 2022 was the world’s fifth-hottest year on record³ and Europe’s hottest summer on record⁴. It was also the year that the US passed the largest climate spending bill in history in the Inflation Reduction Act (IRA)⁵.

Bullock argues while these events are symptomatic of a world in flux and have injected volatility into global economies and markets, a lot of the trends under the new regime are becoming more formalised and, in some ways, predictable. This, he adds, has thrown up potential investment opportunities for long-term thematic investors.

Defence

One example, says Bullock, is in the defence sector. The collective response of western defence alliances to Russia’s invasion of Ukraine as well as China/Taiwan frictions has become more cohesive, with countries sharing technologies and increasing defence spending, he adds.

“Last year both Germany⁶ and Japan⁷ pledged to double their defence spending as a percentage of GDP which is highly significant in the context of the histories of these countries,” says Bullock. “Higher defence spending and co-operation should translate into brighter respects for the defence industry.”

Changing China

Another example Bullock notes is the effect of China’s ageing demographic and shrinking workforce on the distribution of foreign direct investment (FDI) throughout the emerging markets. Amid heightened trade and geopolitical frictions, Bullock expects increased amounts of FDI into markets other than China. “We are seeing a notable pick up in the data of FDI coming to India, Vietnam, and Mexico,” he says. “So, for emerging markets investors this signifies an increasing of the opportunity set.”

Energy spending

Elsewhere, Bullock says the debate around climate change has shifted recently. A few years ago, the discussion was around whether enough people could be persuaded to buy into climate change and whether funding would be available for the energy transition. Now, however, he notes in the last year the passage of the US IRA and Europe’s decoupling from Russian gas have meant this is no longer the issue.

“The issue now is how can countries outcompete each other on the magnitude of spending [on the energy transition] and which technologies will be prioritised,” he concludes.

¹ Guardian. China’s first population fall since 1961 creates ‘bleaker’ outlook for country. 17 January 2023

² Harvard Business Review. Can China Avoid a Growth Crisis? October 2019.

³ NASA. NASA Says 2022 Fifth Warmest Year on Record, Warming Trend Continues. 12 January 2023

⁴ Copernicus. Summer 2022 Europe’s hottest on record. 8 September 2022

⁵ Guardian. ‘Biggest step forward on climate ever’: Biden signs Democrats’ landmark bill. 16 August 2022

⁶ Bloomberg. Germany Doubles Military Spending, But Can’t Rearm Overnight. 24 March 2022

⁷ BBC. Japan defence: China threat prompts plan to double military spending. 16 December 2022.

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