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CONTRIBUTORS

Kim Catechis

Investment Strategist, 
Franklin Templeton Institute

Karolina Kosinska, CIPM

Analyst
Franklin Templeton Institute

Introduction

In our Deep Water Waves publication, we identified several powerful, connected and long-duration factors that will have a significant impact on investment returns over the next decades. One of these is the Geopolitical Wave. Its impact is a radical change in the internationally recognized “order.” The United States has stepped back from commitments overseas and left a geopolitical vacuum. Certain “middle powers” have interpreted this as a singular opportunity to recast this order in their favor, using the narrative around historic hegemony. Others saw this as a singular opportunity to advance their own geopolitical agenda. The result? The first large-scale kinetic (and asymmetric) war in Europe in nearly 80 years has been underway for three years, followed by severe sanctions and significant conflicts in the Middle East, Africa and Asia. And, we saw the end of a giant convergence trade, overturning the relative serenity of the last 35 years.

This paper is a derivative of the “Deep Water Waves.” It sets out the investment case for the defense sector and addresses the dilemma asset owners and investors committed to exacting environmental, social and governance (ESG) standards face. Finally, it provides investors with an overview of the new opportunity set and considers the relative standing of groups of countries like the European Union (EU) as well as the North Atlantic Treaty Organization (NATO),1 in terms of their preparedness for the coming storms. Governments in the European region are treating this as an opportunity to rebuild resilience and security, as well as to create a stronger regional industrial base. Coordination, cooperation and access to financing will play defining roles. For investors, there are compelling and attractive opportunities—and a degree of risk.

This report uses the analysis of the structural positioning of 110 countries (covered by our proprietary Country Risk Framework) to outline potential policy direction and the signposts for investors to watch for.

Kim Catechis and the Franklin Templeton Institute develop thought leadership and research for educational purposes only. Franklin Templeton Institute does not provide investment advisory services or manage money for Franklin Templeton or any of its clients.  Companies referenced in this paper are mentioned for illustrative use and should not be viewed as investment recommendations or as an indication of any trading intent of Franklin Templeton.

Endnotes

  1. North Atlantic Treaty Organization members are Albania, Belgium, Bulgaria, Canada, Croatia, Czechia, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Iceland, Italy, Latvia, Lithuania, Luxembourg, Montenegro, Netherlands, North Macedonia, Norway, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden, Turkey, the United Kingdom and the United States.

 

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International investments are subject to special risks, including currency fluctuations and social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets.

The government’s participation in the economy is still high and, therefore, investments in China will be subject to larger regulatory risk levels compared to many other countries.

There are special risks associated with investments in China, Hong Kong and Taiwan, including less liquidity, expropriation, confiscatory taxation, international trade tensions, nationalization, and exchange control regulations and rapid inflation, all of which can negatively impact the fund. Investments in Hong Kong and Taiwan could be adversely affected by its political and economic relationship with China.

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Any companies and/or case studies referenced herein are used solely for illustrative purposes; any investment may or may not be currently held by any portfolio advised by Franklin Templeton. The information provided is not a recommendation or individual investment advice for any particular security, strategy, or investment product and is not an indication of the trading intent of any Franklin Templeton managed portfolio.

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