A turbulent geopolitical and economic environment is here to stay.
Allocating capital in today’s economic and geopolitical landscape requires a sharp focus on macro trends, a disciplined approach to risk, and an ability to anticipate shifts in policy and global power dynamics. The investment landscape has never been more complex, with heightened tensions between the U.S. and China, uncertainty surrounding Taiwan, and Europe’s economic fragility.
Whiplash and Seasickness
Enormous changes at the last minute, unpredictability, schoolyard bullying tactics, name-calling, and frustration are the new order of the day for geopolitics and trade relationships. It’s nauseating.
Fractured economic blocks are forming from former cooperative trading partners. North America, once a coherent trading block, has fractured into tit-for-tat tariffs and name-calling. Perhaps this tactic will ultimately strengthen a North American trading block by bringing Mexico and Canada to the table hat in hand on the US’s terms. It’s premature to conclude anything except that the newly announced tariffs are untenable and unsustainable.
Bloc by Bloc
A new Eastern Bloc has formed between China and Russia, including Iran and India. A short time ago, China engaged constructively with the United States. Still, China’s need for energy opened an opportunity for Russia to deploy its oil and gas resources to a receptive market, circumventing sanctions after Russia invaded Ukraine. Significantly, this formidable combination strengthens Russia but gives China a more assertive global position. This Bloc is evolving with India as a fulcrum point and China hardening its position.
In the meantime, the United States appears to be engaging with Russia after a White House meeting with Ukraine’s leader that no reality show could have topped. The US is potentially playing off China while simultaneously demanding extortionate tariffs from former allies, alienating European nations, Ukraine, Canada, and Mexico. The US administration is also courting India to weaken its China/Russia bloc, enhance economic development in both the US and India, and circumvent China.
On Taiwan – the world’s most dangerous island, the US is challenging Taiwan’s technological industry and threatening military abandonment. Those threats have morphed into economic engagement, investment in advanced facilities in the United States, and potentially more diplomatic and military support.
The new global reality has yet to emerge, but its recent developments are head-spinning, nauseating, and uncertain. However, a cooler perspective regarding the long term can see an emerging global game.
In Confusion, There Is Profit
Within this complexity lies opportunity. A calm and reasonable perspective, focusing on the long game, can produce attractive capital allocations. Investors who understand the forces and position their portfolios accordingly can generate outsized returns while mitigating downside risks.
The US and China
The competition between the US and China is no longer limited to trade but extends into technology, energy, and military strategy. With China’s economic slowdown and ongoing struggles in its real estate sector, Beijing has been forced to pivot its growth strategy.
The Chinese central government prioritizes artificial intelligence and a homegrown technology industry. The recent “summit” with Chairman Xi and the tech industry leaders was intended to send the global signal that China’s technology will not be second rate or take a backseat to anyone. Xi’s message couldn’t be clearer: ” We are decoupling, and we are going to be better than you.”
Sanctions and restrictions have forced China to double down on its independence and aggressively challenge the US technological lead.
The US, meanwhile, has also doubled down on domestic manufacturing, particularly in semiconductor production (the TSMC deal and clear government guidance on “solving the Intel problem”), energy (“drill baby drill”), manufacturing (the US steel and Nippon steel transaction is but one example). The recently announced TSMC strategy to invest an additional $100 billion in the United States for chip design and manufacture.
US Industrial Policy
The global supply chain for technological innovation and development is in the crosshairs of the US administration, which desires to domesticate as much of this industry as possible. This highlights a broader industrial policy to bring the world’s leading manufacturing, design, and development within US borders. This includes industries as wide-ranging as steel manufacturing, semiconductor design, development and manufacturing, and shipbuilding, among many others—regardless of how realistic this may be.
This may play for the masses, but, for example, the TSMC $100 billion investment still only represents approximately 5% of global chip manufacturing and won’t be the most advanced chips. That requires a formidable ecosystem present only in Taiwan and cannot be replicated anywhere else in the world, not even in the United States. Regardless of political leaders’ desires, the talent, interaction, and collegial cooperation required among global industry leaders cannot be recreated.
Taiwan
Taiwan remains the linchpin of global semiconductor supply, and any conflict or economic disruption in the region could send shockwaves through international markets. Recent loud saber-rattling increased the risk of military escalation from low to worrying, with military strategists mapping out cataclysmic scenarios.
A blockade or sanctions on China would devastate global prosperity and technological innovation and disrupt all trade flows. While political bluster is increasing, the status quo remains, maintaining economic stability. Will the status quo remain? It’s in everyone’s best interests, but it may not be persuasive enough for current political leaders.
Taiwan has responded by engaging economically with the United States. TSMC’s commitment to building chip manufacturing facilities in the United States is an essential first step. It is likely the vanguard of additional investments in the United States from Taiwanese companies and investors, creating economic engagement and self-interest for the United States and Taiwan.
This is a diplomatic masterstroke.
Unflinching support comes from irreversible economic interest. The deeper Taiwan engages with the United States, the more the “status quo” remains with China, the more likely stability remains for Taiwan’s society and inhabitants, and the better economic returns for that capital being deployed to the United States.
Critical semiconductor manufacturing and component supply chains include Japanese and South Korean players. Taiwan’s diplomatic maneuvers also impact Japan and South Korea, and a similar investment strategy for South Korea and Japan makes sense—engage with the United States and fortify mutual economic interests. This will strengthen diplomatic ties and support.
Europe Struggles
The European Union faces high energy costs, sluggish growth, and increasing political fragmentation. Germany’s manufacturing base is under strain while Brexit’s economic aftermath reverberates. Inflationary pressures persist, and potential banking instability from Germany to Italy could add to the uncertainty.
Politically, Europe is moving dramatically to the right, as we’ve seen in recent German, Dutch, and Italian elections. Ukraine will continue to be a flashpoint, but frustration with sluggish growth, high overall costs, and stifling bureaucracy sparked Brexit. It may give more weight to authoritarian governments emerging in Hungary and Slovakia.
Europe wants to engage more with China to regain some economic vitality. The United States wants Europe to buy more US goods and is imposing tariffs. All this leads to a greater likelihood of economic stagnation throughout the European Union.
The Tea Leaves
Inflation remains a persistent challenge. Central banks manage interest rates cautiously, but inflationary pressures bring abrupt changes. Interest rate disruptions disrupt economies. This potential vulnerability has recently been understated in global financial markets but may not be hidden long.
Energy, especially oil and gas, will remain volatile. Europe’s gas supplies are uncertain. Russia would like to reengage, and the United States would like to replace European gas supplies with LNG shipments. Middle East volatility has not impacted long-term energy prices because the United States has stepped in to moderate the global market. The US administration would like to see more domestic oil produced even though the US is now the world’s largest oil producer. So, producing more while keeping prices high revokes the laws of supply and demand.
Good luck with that.
Manufacturing
With reshoring efforts and deglobalization accelerating, US-based manufacturing could experience a renaissance. Government incentives for domestic production, especially in technology and defense, will drive capital into these sectors.
Advanced technology applied to defense, especially software tools provided by firms like Palantir and drone technology provided by Anduril, represents unique opportunities for high growth in the convergence of technology and military defense.
While US steel gets a lot of attention, and aluminum tariffs are designed to bring “old school” manufacturing back to the US, it is “new school” software and technology-based products, services, and production that will drive US economic growth.
The Signal and the Noise
The best investment strategy in today’s environment incorporates geopolitical risk management and focuses on what is real and sustainable rather than a near-term but temporary shock.
Diversification with a long-term perspective, incorporating resiliency, defensiveness, and growth opportunities, is best positioned to capitalize on evolving trade and economic policies.
The new reality is that trade realignments, subsidized industrial policies, and emerging trading blocs characterized by protectionism and localization are rising.
Now What?
Geopolitical risk is no longer an afterthought. The US-China rivalry, Taiwan’s strategic importance, Europe’s economic fragility, and shifting trade policies will shape the next decade of global markets. Savvy investors will anticipate these changes and allocate capital to industries and regions positioned for sustained growth.
The key to success is flexibility, resilience, and the ability to recognize macro trends before they materialize fully. The future is uncertain but full of opportunities.