INSIGHTS
The Pacific Pension & Investment Institute (PPI) convened in Vancouver, Canada, on July 13-15, 2022, for its Summer Roundtable. The central theme, Stemming the Inflationary Impact of Geopolitical Events, was timely, with consumer price index (CPI) inflation at multi-decade highs in economies worldwide and Russia’s invasion of Ukraine well into its fourth month. Participants explored the implications of global food shortages and shifting agricultural supply chains while balancing the challenges and opportunities in the energy transition. They addressed the effects of sanctions on global finance and trade, and of geopolitical tensions on the Arctic. The economic and political implications of China’s zero-COVID lockdowns, as well as the role of innovation in managing global challenges, rounded out the discussions.
Global Economic and Geopolitical Risks
Central banks are paying particular attention to energy prices, supply chain impacts, and inflation expectations as they tighten monetary policies. Driven largely by geopolitical developments, they have been emboldened to contain inflation. Central banks will likely be able to navigate economies toward a mild recession, albeit with the risk of some volatility. Emerging markets are showing greater resilience due to more proactive policies.
The now protracted war in Ukraine risks further escalation if Russia ramps up unconventional tactics to complement its ongoing military operations. Chemical and cyber warfare, as well as attacks on critical infrastructure, are all real threats. In time, however, both sides will feel the toll from excessive casualties and a limit to combatants’ abilities to sustain this war. Negotiations toward a resolution in 2023 are possible, and one potential scenario is a Korean War-like armistice.
China’s zero-COVID lockdowns have dampened economic growth and accelerated the exodus of expatriates and relocation of supply chains. The Chinese leadership is holding firm on its zero-COVID policy, however, partly due to past successes in containing the virus and the political capital at stake. This policy will be implemented flexibly to mitigate the economic pain. The long-term investment outlook for China remains positive due to its sheer market size and the opportunities from Chinese innovation.
Food, Agriculture, and Energy
Disruptions in the global food and agricultural supply chain have compromised the delivery of food supplies, driven up food prices, and exacerbated food insecurity. The immediate effects will be most acute in developing countries in Africa and Asia. The long-term impact will depend on how the war unfolds and the fate of vital Black Sea ports. If anything, recent developments have reinforced the need to improve the resilience of the global food and agricultural system, including through investments in logistics and food technology.
The energy implications of the war have spurred debate about the trade-off between energy and climate security. Yet high energy prices could provide an impetus for alternative energy projects and the acceleration of the energy transition. Given its important role across traditional asset classes, many investors treat the energy transition as an investment theme rather than a separate asset class. Opportunities can be found in new technologies, including clean hydrogen and carbon capture.
Evolving Issues
Global trade and finance have long been weaponized, and the ongoing sanctions against Russia are the starkest example of how the U.S. has used these tools with increasing aggression. More targeted sanctions would mitigate the collateral damage to other economies and the uncertainty and risks for international investors. Meanwhile, China and other countries are seeking to develop alternative global settlement systems that would reduce their reliance on the U.S. dollar.
The geopolitical fallout from the war in Ukraine has reverberated in other areas such as the Arctic. Collaboration between Russia and the West has been stymied in development, climate change, and natural resource management. Security tensions are rising in the European Arctic, while the North American Arctic remains relatively peaceful in contrast. Investment opportunities can be found especially in infrastructure due to the Arctic's growing importance to global shipping and trade.
Other Investor Considerations
With the world facing myriad crises, innovation can help address some of society’s toughest challenges. Governments can encourage innovation by creating ecosystems that attract and nurture global talent. Key areas for long-term investments include the greening of the supply chain and cutting-edge technologies such as robotics, artificial intelligence, blockchain, and quantum computing.
The technology sector is undergoing a correction, and the fall in tech stock valuations has contributed to the rotation from growth to value. With imperfectly priced markets in a changing global macro environment marked by inflation and monetary tightening, the definitions of value versus growth are increasingly blurred. Investors are also paying greater attention to the impact of environmental, social, and governance (ESG) factors on company value.
Institutional investors are searching for a balance between ESG considerations and their fiduciary duties. The “S” is increasingly important in real assets as infrastructure projects and resource extraction, such as energy and forestry, will impact local communities and biodiversity. Owners of these assets may have the legal right to operate in those communities, but they will also need to be mindful of the social license, which is less tangible to measure.