22 August 2023
After years of relative peace and prosperity, a more unstable geopolitical environment is producing fresh challenges for investors. But among the risks, opportunities are starting to emerge.
Admiral James Stavridis, former Supreme Allied Commander of NATO and vice chair for global affairs at investment firm Carlyle Group, says there are several concerns facing the global economy, foremost among them Russia’s ongoing war against its neighbour Ukraine.
Ukraine has had the military and economic support of the West in facing down Russia, and on a basic appraisal, Ukrainian resistance has shown the impact a unified response from Western allies can have, says Admiral Stavridis. But there are still challenging unknowns around the ultimate outcome of the conflict.
Using the language of private equity, Russia and Ukraine have different ‘burn rates’. “Russia has a terrible burn rate and Putin is working his way through people,” he says, highlighting that around one million soldiers are either dead or wounded, and many talented young people have left the country. “By contrast, Ukraine’s burn rate is being moderated by the West’s financial backing and patience, with dollars continuing to flow, at least for now.”
The results so far are telling, he says. “Russia has been pushed back very effectively. Sanctions and the freezing of assets are beginning to have an accelerated impact on the Russian economy.”
Long on China
Even alongside potential risks, opportunities can emerge for those able to see clearly and take action on objective observations.
While the US-China relationship is a potential flashpoint for the global economy and markets, it is unlikely to result in the type of post-war standoff seen between the US and USSR, says Admiral Stavridis.
“The Cold War was between two completely decoupled economies and three million troops nose-to-nose, and two huge battle fleets playing ‘The Hunt for Red October’. That is not where we are heading, in my view,” he says. “But we should neither underestimate nor overestimate the challenges in China.”
Anyone investing in China – as in any other region – needs to remain well-informed and deliberate in their approach. As for US-China relations, he says, “there will be a lot of speed bumps, but we will work through these challenges.”
To that end, he adds “we [Carlyle Group] are buying Chinese companies and creating opportunities for Chinese investors. We have a superb team on the ground, and we are not backing away from that.”
The rewiring opportunity and AI revolution
While energy security is a key issue arising from the Russian war against Ukraine, the re-ordering of the global energy network could offer new opportunities for global investors. Ongoing efforts to limit the environmental impact of climate change are also likely to result in further disruption, for good and bad, says Admiral Stavridis.
“We are currently seeing the rewiring of the global energy system and this has significant investment implications,” he explains. “I’m a mariner and have sailed the waters of the Arctic. The ice is melting rapidly and that will cause sea levels to rise and open it up as a zone of competition, if not conflict.”
As potential new geopolitical hotspots appear, governments are rushing to make use of emerging technologies to give them a greater edge, including in the rapidly growing arena of artificial intelligence.
“In the world of defence spending, all the smart bets are on AI,” says Admiral Stavridis. “There are profound investment implications in the world of defence and cybersecurity. The impacts will range from replacing humans with AI capabilities to pure military uses.”
As with many emergent technologies, when militaries invest in them, civilian consumers and businesses are rarely far behind. The rise of AI is likely to have profound impacts on how people engage with each other through social media and will likely catalyse new opportunities.
“Social networks have 4.5 billion people on them. They are part of the biggest communication platform ever built, by a factor of infinity, and the investment opportunities – particularly as AI drives into them – and the dangers are very significant,” he says.
“When we couple social media with geopolitics, we see India as a profoundly good bet. It has demographics, widespread use of English, links to the West, and above all, it is a democracy.
“When the history of this century is written, it won’t be about the rise of China or decline of the US, it will be about the rise of India.”
Being ready for the hard work
“Investing is hard, like Sisyphus pushing the boulder uphill,” says Admiral Stavridis. “Being part of teams like Mercer or Carlyle, which help provide advice and knowledge, helps us push the boulder up. But no matter what, it still rolls down, whoever you are.
Recognising the outcome of previous efforts can provide an incentive to persevere, he notes, with the war in Ukraine demanding significant reconstruction opportunities once the conflict ends.
“At the end of the Korean war, a satellite picture would have shown a dark peninsula,” he says. “If you take it today and draw a line between the two, there is one point of light in North Korea, Pyongyang, and at the bottom is the ninth largest economy in the world.
“I wouldn’t say that Ukraine is going to be the ninth largest economy in the world in 70 years, but the point is the reconstruction opportunity and determination of the Ukrainians means there is an opportunity. Much of that will be done with Russian money frozen in Western banks.”
As all investors know, markets – like politics – can change quickly and dramatically. Preparing for opportunities, taking them when they appear, and responding to adversity can seem never-ending, but persistence always pays off in the end, says Admiral Stavridis. “What matters as an investor is that you are willing to put your shoulder to the stone, again and again.”