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War or peace? Trump or Biden? Barbie or Oppenheimer?
Pundits and prognosticators will happily pronounce what they think the future holds. But their track record is patchy; witness last year’s predictions for a China re-opening boom and a global recession. Pollsters have also had a bad run for the past few years. From a more technical perspective, if an event hasn’t already transpired, how can you expect a model relying on historical data to anticipate it?
Geopolitical risks have made the top of the list for 2024 by business leaders—not even making the top 5 in 2022. So does it make sense to rely upon the same tools to think about geopolitical events impacting millions of citizens and the global business environment that are used for sports betting?
Instead, better to put away the crystal balls and start testing your organisation’s exposure to a range of plausible hypotheticals, part of an overall approach I call raising your “PQ”—Political Quotient. In large part this means overcoming the ingrained tendency toward expecting mean reversion—expecting a return of the previous status quo—e.g., the nostalgia for an imagined “back to normal”.
Focusing on the two main drivers of risk that could disrupt the 2024 global outlook, there is little disagreement:
1) Wars; bigger, worse, and more of them
2) The mega-election cycle, with nearly half the people on planet Earth eligible to vote, including in many systemically- and geo-strategically-significant countries like the US, India, Mexico, Taiwan, Russia and many more.
Failures Of Imagination
Moving to “failures of imagination”, as the 9/11 commission termed them. It is concerning that business leaders have failed to take on board the key lessons of Putin’s “surprise” invasion of Ukraine (it was not), and the comforting narrative taught in Behavioural Economics 101 that people act in their “rational economic self-interest” (they do not).
For example, conversations with board executives and institutional investors consistently highlight that while there is concern about the risk of conflict escalation in the Middle East and Ukraine, it is not widely held as being likely, with few companies seriously considering altering business strategy or asset allocation. Indeed, in recent survey I ran, only 5% of respondents identified conflict escalation in Ukraine as a top risk to the business environment for 2024.
However, the intellectual underpinnings for the “contained conflict” thesis are not especially well-developed, beyond a collective impression that in both regions, conflict has remained contained during the period of recent memory.
The business leaders we surveyed expressed more concern about China/Taiwan tensions flaring up in 2024, especially with Taiwanese elections due January 13. Here too, leaders appear to have largely resumed their pre-Ukraine invasion geopolitical rationale of “it would be crazy/too economically disruptive” for China to provoke a conflict with Taiwan. It would indeed be costly—a Chinese invasion of Taiwan is the “big one” from a geo-economic perspective. But commercial logic will not be the key factor in Beijing’s strategic calculus—it will be whether Beijing thinks it can get away with it.
It’s election year. Everywhere.
In 2024, more people will go to the polls than in any one year in prior human history. Lots of elections should not necessarily be de-stabilising however, assuming they are free and fair and meet the basic condition for democracy: the loser accepts the result. Under the present circumstances, these are all big caveats unfortunately, as hybrid-regimes, “partially” or “not free” governments and “democratic backsliding” are all on the rise according to Freedom House and the BTI Transformation Index.
Here is where we run into trouble if we expect to see a continuation of the status quo ex ante: a whole host of actors and institutions will influence the road to November 5th elections in the US, including numerous state and federal court decisions , plus the US Supreme Court’s decision due February 8th on former President Trump’s eligibility to appear on the 2024 US presidential ballot all playing a role, and the country’s institutions tested in entirely new ways at a time when division and polarisation are sky-high.
2024 US elections are going to be, by default, a referendum on the post-1945 system, which, while admittedly flawed and creaking, created the conditions of global growth and trade that have powered 40+ years of prosperity.
During the past 30 years of peak globalisation and the Pax Americana — which brought unprecedented peace and prosperity— investors and business leaders in the rich, industrialised world have not had to devote much time to “Macro”—it didn’t change much under the liberal institutional order. Instead, they could afford to focus on growth forecasts, interest rates, currency fluctuations and commodities prices, while tracking (and influencing) domestic regulation.
Unlearning outdated conventional wisdom chestnuts like the notion that increased economic prosperity would ultimately lead to a convergence in global attitudes toward economic freedom, civil rights and civil liberties. This will take time, but it must be done if business leaders hope to “prepare their minds”, in the words of Louis Pasteur, for the coming decade of dislocation, when geopolitics and social change will play an outsized role in the business and investment environment compared to the previous era.
Brass Tacks: Identifying Plausible Hypotheticals
Returning to useful guidance for approaching the geopolitical outlook for 2024, having pooh-poohed the standard approaches, let’s discuss the idea of plausible hypotheticals—scenarios and outcomes that have a material probability of taking place—10% or more. In each of the three top geopolitical themes for 2024, there are a number of possible outcomes beyond the binary winner/loser construct that prevails, often described as “sub-threshold” in military parlance. An impact assessment of these should be tailored to the specifics of your risk profile, taking into consideration sectoral and geographical exposures, but for starters, consider the following:
What happens to my strategy/portfolio if the following happens:
US Elections
-Trump wins
-Biden wins
-Candidate unable to run or take office
-Disputed election outcome delays result
-Significant/violent civil unrest
Russia-Ukraine War
-US military aid postponed/reduced
-Russia wins
-Russia loses
-Ukraine joins NATO
-Ukraine begins EU accession process
-Russia-NATO conflict
-Unconventional weapons used
-Trump withdraws the US from NATO or cuts funding
Hamas-Israel Conflict
-Temporary cease-fire
-Israel pursues Hezbollah positions in Lebanon
-Houthi rebels step up Red Sea attacks on global shipping
-US forces in Mediterranean are targeted in meaningful attack
-Iran steps up proxy attacks
There’s plenty of scope for competing assessments here, but these are the kinds of conversations that need to be happening inside boardrooms, but are often avoided for fear of provoking controversy. Such politeness could ultimately prove to be expensive.
Wild Cards and Unintended Consequences—Fool Me Once
I have been in many boardroom discussions where the assumption is that a diplomatic solution simply granting Russia the territory it seized by force during the Ukraine war would bring peace— an end to hostilities and a magical return to the pre-invasion status quo. This is a view we vigorously contest, based on historical precedents. Likewise, the argument that ending US military aid to Ukraine would mean an end to the conflict is misguided. Allowing a war over territory to succeed is more likely to open the floodgates to similar challenges around the world, increasing the overall number of conflicts and producing a host of unintended consequences. Indeed, this rationale explains why nations such as Japan, far from Europe, have maintained support for Ukraine and the notion of sovereign borders. 85% of the world’s conflicts have been fought over disputed borders and territory.
Following delays to the vote on Ukraine aid in the US House of Representatives, we are already seeing more energetic moves toward directing impounded Russian assets toward Ukraine for its war effort; Ukraine’s invitation to begin EU accession negotiations, and a debate for EU member states to increase the amount of military support to Ukraine to make up for an expected reduction in U.S. military support.
The constellation of unintended consequences and by-products of so many geopolitical factors being unleashed into the business ecosystem is concerning, but can be structured and refined. The only real pre-requisite for being better-prepared for the new era of geopolitical risks is an open mind.
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