War/Conflict

Macro and geopolitical risks may spoil the narrow window for a stock market rally before recessionary trends rise to the fore.

No, the secular rise in geopolitical risk has not peaked. EU-China trade ties underscore the multipolar context, but this multipolarity is unbalanced, as the US has not reached a new equilibrium with its rivals. While the second quarter is murky, investors should stay defensive this year on the whole.

Bullish equity sentiment may persist in the second quarter on the Fed’s pause, but tight monetary policy, financial instability, elevated recession odds, extreme US polarization and policy uncertainty, and still-high geopolitical risk should encourage investors to maintain a defensive position for the coming 12 months.

Stay defensive in the second quarter. We can see a narrow window for risky assets to outperform but we recommend investors stay wary amid high rates, supply risks, extreme uncertainty, peak polarization, and structurally rising geopolitical risk.

China is launching a diplomatic charm offensive to improve relations with the world excluding the United States. But China’s proposals in Ukraine and the Middle East are overrated in their ability to restore global stability and reduce geopolitical risk.

US financial instability reinforces our bearish investment outlook by weighing on economic growth and corporate earnings while also increasing US policy uncertainty and geopolitical risk.

The Russia-Ukraine war has prompted Europe to ramp up its defense spending. This will greatly benefit its defense industry, especially if defense coordination across the EU increases.