Cold War Impact Investing
The Ukrainian Russian military confrontation is likely to have a profound impact on everything, including investing, so how will the new Cold War impact investments?
First, let’s look at three possible outcomes from the Russian/Ukrainian war.
In all scenarios, we assume that Ukraine will soon be occupied, bearing in mind Russian overwhelming forces and control of the skies, which means a conclusion is imminent.
So we will see a ceasefire, within days, or frightening will escalate to the point where everything is bombed, shelled, and there will be nobody alive in Kyiv. Let’s hope the Ukrainian surrender fast, lives are saved, because the next stage of the war is going to be blood drenching.
Russia joining NATO could put a stop to this war
Mikhail Gorbachev, a Soviet former statesman, requested for Russia to join NATO in 1990 but the proposal was declined by the UK and the US.
So, the best-case scenario, would be Russians joining NATO, but that is unlikely and inquisitive minds should ask why?
Next, in the case scenario, Putin occupies Ukraine, pushes further West, and threatens NATO countries. NATO’s Article 5 is invoked, WW3 then starts and ends in a nuclear confrontation.
Moving swiftly onto the third and most likely scenario, Ukraine is occupied, Russia installs military bases in Ukraine, similar to the US in Western Europe in WW11, and there is no further push West.
In the third scenario, the Russian occupation of Ukraine and a new Cold War follows.
What will investing in a Cold War mean for investors
The public deficit of NATO-aligned countries is likely to increase as a greater proportion of their GDP will be allocated towards NATO spending. So, with NATO spending expected to increase, this is a bonus for the military-industrial complex.
Already, we can see defense contractor stocks prices outperforming.
Investing in a Cold War will also have an impact on energy investing
So foreign policy aligns with a security policy which walks lockstep with energy policy.
Energy entails sizable CAPEX spending and distribution networks of pipelines across geopolitical regions.
So, already we are seeing the big western oil companies divest in Russia due to the deteriorating geopolitics.
Investing in the cold war is likely to strengthen USD hegemony
If security and energy policy walk lockstep, it is all done on a USD racetrack. NATO membership fees, western arms deals are all made in USD.
Oil and gas deals are also transacted using USD. A Cold War causes countries to pivot west, which increases demand for USD.
Moreover, demand for US treasuries rises in times of geopolitical uncertainty because demand for US dollar-denominated assets grows.
Investing in the cold war could mean that the Fed gets away with higher inflation without raising rates more aggressively
So the demand for perceived safe-haven treasuries keeps the yields lower, making financing the 30 trillion public deficit less burdensome.