The Great Game: Geopolitical Risk Looms Large for Investors
In the late 19th century, when the British empire was at its zenith, members of Her Majesty’s Secret Service called geopolitics “The Great Game.” The expression stuck.
For investors lately, The Great Game has become a big factor. Let’s start with the world’s second-largest economy, China.
China is emerging as a worry, but not as a rival to America. The red dragon is becoming the global economy’s albatross. If you give credence to the idea that America is in decline and our country will get supplanted on the world stage by China, you should think again.
Falling inflation, rising gross domestic product (GDP) growth, and low unemployment are giving the U.S. the world’s best recovery.
Ignore the politicians on the presidential campaign trail who are trash-talking the U.S. economy. They live in a post-truth world where lying is as routine as breathing. Many Americans, sad to say, have become impervious to reality.
In the real world, it’s the Chinese economy that’s in a shambles.
A Hong Kong judge on Monday ordered bankrupt Chinese real estate giant Evergrande to liquidate, citing the company’s failure to provide a feasible restructuring plan.
Evergrande is the world’s most indebted property developer. The firm’s on-balance-sheet liabilities amount to roughly 2% percent of China’s annual GDP, and its off-balance-sheet obligations account for another 1%. Evergrande’s implosion has triggered a liquidity crisis in China’s real estate sector, which represents about a quarter of the country’s economy.
The wild card for the global economy this year will be China and whether the country can rebound from decelerating GDP growth, a real estate crisis, sluggish domestic demand, soaring youth unemployment, and a declining population. In 2023, China’s debt-to-GDP ratio climbed to a new record high.
Concerns are mounting about President Xi Jinping’s economic stewardship. These concerns are exacerbated by recent purges of top government officials, for reasons that remain opaque but are rumored to stem from corruption. (At least China’s disfavored officials aren’t falling out of windows or getting blown up in planes, as is the custom in Russia.)
China isn’t the only geopolitical risk, of course. Terrorist attacks on Red Sea shipping lanes are disrupting supply chains and roiling energy markets. In a drone attack in Jordan this week that’s been linked to Iran proxies, three U.S. servicemen were killed, prompting Washington’s hawks to call for revenge.
In Gaza, bloody strife between Israel and Hamas threatens to spread throughout the region. In Eastern Europe, the Russia-Ukraine war rages on.
The word “genocide” is increasingly appearing in news headlines. These overseas developments are rattling global investors but boosting aerospace/defense stocks. The shares of U.S.-based military contractors are appealing investments right now, as global defense budgets surge.
Closer to home, the news for investors is more optimistic.
The remainder of this week will be chock full of pivotal S&P 500 operating results, U.S. labor market readings, and a policy decision from the Federal Reserve.
The U.S. central bank will make another fed funds announcement Wednesday. The overwhelming consensus on Wall Street is that Fed Chair Jerome Powell and his minions will hold policy rates steady at 5.25% – 5.50%, in the wake of encouraging inflation data.
The focus won’t be on what the Fed does, but on what Powell says at his traditional post-meeting press conference. Wall Street will parse Powell’s words for clues as to future rate decisions. CME Group’s FedWatch tool indicates a full percentage point of interest rate cuts by the end of 2024.
Small caps are set to shine…
Amid the broader U.S. stock market rally, small-cap stocks are coming back to life after underperforming in 2023. As the following chart shows, the benchmark iShares Russell 2000 ETF (IWM) has risen well above its 50- and 200-day moving averages:
A rising moving average indicates that the security or index is in an uptrend, while a declining moving average indicates a downtrend.
The Relative Strength Index (RSI) of IWM hovers at about 61. The RSI measures the speed and magnitude of recent price changes, indicating oversold or overbought conditions. Above 50, the RSI is bullish and below 50, it is bearish.
U.S.-based small caps are generally good bets now, as the economy shows increasing signs of strength without overheating. This asset class did poorly last year, which means you can find value plays among the small fry that are poised to pop higher. Because most of their revenue comes from domestic sources, these smaller U.S. public companies also provide a hedge against geopolitical turmoil.
This week, though, the mega-caps will occupy the spotlight. Technology behemoths Alphabet (NSDQ: GOOGL), Amazon (NSDQ: AMZN), Apple (NSDQ: AAPL), and Meta Platforms (NSDQ: META) are all scheduled to report earnings. Whether stocks build on last week’s gains is largely up to the quarterly report cards of this coterie of tech stalwarts.
As investors await the Fed’s decision and pivotal earnings reports, the main U.S. stock market indices closed mostly lower Tuesday as follows:
- DJIA: +0.35%
- S&P 500: -0.06%
- NASDAQ: -0.76%
- Russell 2000: -0.76%
In two positive technical signs, the benchmark 10-year U.S. Treasury yield dipped -0.78% to close at 4.0%, and the CBOE Volatility Index (VIX) dropped more than 2% to sit at about 13.
Big news on Friday…
If you’re looking for an exceptional growth opportunity, you should consider Apple. But I’m not suggesting you actually buy Apple shares.
On Friday, February 2, Apple is scheduled to release its new Vision Pro device, a headset that promises to shake up the augmented/virtual reality (AR/VR) market.
However, the tech analysts at Investing Daily have determined that this new Apple gadget is dependent on mission-critical software made by a tiny, under-the-radar tech innovator. Without the software provided by this small company, Apple’s so-called genius device would be a catastrophic failure.
Apple’s dependence on this software opens a huge investment opportunity. You won’t see this small-cap stock mentioned on CNBC, but it’s set to explode on the upside.
I urge you to make your move before February 2. That’s the day Apple rolls out the new Vision Pro device…and that’s when a profit surge could start for their small software partner. Click here to learn more.
John Persinos is the editorial director of Investing Daily.