Investors should consider reducing risk and transitioning toward more defensive assets, markets and sectors as recent geopolitical developments signal “a new bout of global instability,” BCA Research strategists said in a Tuesday note.
The investment research firm pointed to several noteworthy developments unfolding simultaneously.
More concretely, the recent death of Iran’s President Ebrahim Raisi in a helicopter crash highlights the escalating instability in Iran and the broader Middle East, a trend that appears to be worsening over the long term.
Investor optimism about the region hinges on the belief in Iranian restraint, BCA said, which supposedly prevents conflicts over Iraq and oil flows.
However, Israel’s government remains vulnerable and is focused on long-term security. This focus likely means that Israel will push back against Iran’s militant proxies, while the Islamic Revolutionary Guard Corps (IRGC) is expected to continue strengthening its regional influence.
“Also, Iran needs to prepare for a potential Trump “maximum pressure” campaign,” BCA noted.
Israel’s offensive in the city of Rafah further adds to the geopolitical risks in that region.
Elsewhere, Russia and China continue to strengthen their de facto alliance. Both nations have openly pledged to work together against what they describe as a "hegemonic" United States.
Unlike during the Sino-Soviet split, their current national security strategies and economies are complementary, BCA strategists said.
China is providing economic and “quasi-military support” for Russia's war in Ukraine in the form of dual-use goods, third-party re-routing, and other methods, evidenced by increased trade through North Korea and Kazakhstan.
“China’s peace proposal reinforces Russia’s demands, enabling Russia to embrace it, and pressuring the West to come to terms,” said strategists.
Meanwhile, the anticipated détente between the U.S. and China never materialized, contrary to media speculation last year, partly due to the strengthening Russo-Chinese alliance.
China is attempting to mitigate its economic slowdown, which worsened in April, through increased exports. In a bid to appear tough on China, President Biden raised tariffs on May 15, echoing Trump's policies. Although currently limited, this move signals potential future tensions.
Biden's shift from a dovish to a hawkish stance on China reflects his administration's strategic response to economic and political pressures. If his approval ratings decline further, his hawkishness is expected to intensify.
“China will retaliate, beyond an anti-dumping investigation into polyformaldehyde copolymer, because it needs to divide the US populace,” BCA’s team wrote.
“If US corporate sentiment suffers, Biden’s odds of winning the election will fall, and an election loss would discourage future presidents from escalating trade wars. If China does nothing, Biden or Trump will double down on trade and tech war,” it added.
According to BCA, the ongoing geopolitical tensions are likely to cause sporadic spikes in oil prices amid a cyclical economic slowdown, driven by supply constraints. Similarly, wheat and European natural gas and electricity prices could see sharp increases due to Russia's actions in Ukraine.
Given these dynamics, BCA said it tactically favors oil over copper.
The firm believes investors’ strategies should remain overweight in low-beta and long-duration assets. However, within high-beta and cyclical assets, it is prudent to focus on geopolitically linked opportunities such as defense, cybersecurity, and energy/mining sectors, which are poised to benefit from ongoing global risks.