Jupiter Merlin Weekly: China in the limelight and the US in twilight
Jupiter Merlin Weekly: China in the limelight and the US in twilight
The Jupiter Merlin team look at the shifting landscape of geopolitics, as China’s role as an international mediator illustrates new global power dynamics.
Investment Manager, Jupiter Independent Funds/Merlin
Investment Manager & ESG Investment Director, Independent Funds/Merlin
The Middle East: Saudi Arabia in the spotlight…
“We are going to in fact make them pay the price, and make them in fact the pariah that they are.” In somewhat mangled American-English, that was Joe Biden’s pronouncement on Saudi Arabia when on the presidential campaign trail in 2019. He quickly doubled down on his views on the desert kingdom. Despite Saudi historically being a cornerstone ally of the US in the Middle East and Arabia, Biden added “there is very little social redeeming value in the present government in Saudi Arabia”, referencing Saudi’s human rights record, the assassination of Jamal Khashoggi and Saudi’s role supporting the Yemeni government in the proxy war against the Iranian-backed Houthi rebels.
Newton’s Third Law of Motion states that for every action there is an equal and opposite reaction. The same could be said to apply to diplomacy: throw verbal rocks at someone and one way or another they’ll throw them (or something more subtle) back.
Newton’s Third Law of Motion states that for every action there is an equal and opposite reaction. The same could be said to apply to diplomacy: throw verbal rocks at someone and one way or another they’ll throw them (or something more subtle) back.
China in the limelight…
Since we last wrote of the geopolitical sands rapidly shifting as Biden’s ‘international struggle between Democracy and Autocracy’ progresses in Ukraine, two important events have happened both concerning Saudi Arabia. First, what was described to the author by a military figure who had senior first-hand experience in the Second Gulf War, as a “game changer”. While the UK media was obsessed last month with whether Gary Lineker ran the Home Office or the BBC, or both, and the investment world was preoccupied with wobbly banks, elsewhere a major diplomatic coup was being pulled off: talks were completed restoring diplomatic ties between erstwhile implacable foes Saudi Arabia and Iran. If that was not enough of a shock, the added frisson causing perceptible ripples in the geopolitical pond was generated by the revelation of who was the broker: China.
If China mediated, the US was most definitely disintermediated. The flustered US reaction revealed in an instant that a) Washington had no idea what was happening or what the ramifications were and b) it was stunned that it was China which had conjured the trick.
Consider how the dots join up: China and Iran are allies, their mutual bond cemented in oil and China’s need of suppliers and Iran’s want of customers; for years China and Saudi have been colluding with Russia about finding alternative settlement systems to undermine the petrodollar hegemon (that which confers much of the gravitational pull of the US dollar and the Federal Reserve); Iran is a key consideration to the progress of China’s New Silk Road and without Tehran’s cooperation the project is less a holistic, integrated infrastructure system spanning Asia and Europe than a cul-de-sac, a dead-end with a “HALT!” barrier extending from the Gulf to the Caspian (while Saudi with its access to the Red Sea and thence the Gulf of Aden is an important alternative to the Karakoram Highway through Pakistan down to the Indian Ocean); Riyadh currently has little time for the US and has a deep antipathy towards the Democrats and Joe Biden in particular, and Tehran remains actively hostile to Washington. Even if Saudi and Iran are not buddies (the ideological internecine gulf between the Islamic Sunni and Shia sects may be too wide for that), that they are willing to entertain no longer actively abusing each other is an important step to restoring stability in the Middle East and Arabia (especially neighbouring Yemen). It remains to be seen how Israel sees this development in the context of Iran, given the recent rightward shift of government under Benjamin Netanyahu.
Second, and directly linked, was OPEC’s and Russia’s joint decision last weekend to reduce oil production by 1.2m Barrels/day (roughly 1-1.5% of global production) to try and put a floor under a slipping price in the face of a slowing global economy. The price of Brent Crude promptly jumped 8% back to the mid-$80s/barrel. Saudi is OPEC’s biggest producing member: last summer when oil prices were at all-time highs approaching $150/barrel and Biden was desperate to relieve the pressure on US drivers at the pumps, Saudi firmly rebuffed all US pleading to open the taps and flood the market. However justified the sentiment, Biden’s 2019 campaign insults against Saudi came back to bite him, as has happened twice since, including a few days ago. It is now clear that Saudi is looking after its own interests first which, as one commentator observed, includes an eastward shift in strategic, political and economic emphasis towards potentially faster growth economies still hungry for hydrocarbon fuels, and specifically nurturing ties with China.
If China mediated, the US was most definitely disintermediated. The flustered US reaction revealed in an instant that a) Washington had no idea what was happening or what the ramifications were and b) it was stunned that it was China which had conjured the trick.
Consider how the dots join up: China and Iran are allies, their mutual bond cemented in oil and China’s need of suppliers and Iran’s want of customers; for years China and Saudi have been colluding with Russia about finding alternative settlement systems to undermine the petrodollar hegemon (that which confers much of the gravitational pull of the US dollar and the Federal Reserve); Iran is a key consideration to the progress of China’s New Silk Road and without Tehran’s cooperation the project is less a holistic, integrated infrastructure system spanning Asia and Europe than a cul-de-sac, a dead-end with a “HALT!” barrier extending from the Gulf to the Caspian (while Saudi with its access to the Red Sea and thence the Gulf of Aden is an important alternative to the Karakoram Highway through Pakistan down to the Indian Ocean); Riyadh currently has little time for the US and has a deep antipathy towards the Democrats and Joe Biden in particular, and Tehran remains actively hostile to Washington. Even if Saudi and Iran are not buddies (the ideological internecine gulf between the Islamic Sunni and Shia sects may be too wide for that), that they are willing to entertain no longer actively abusing each other is an important step to restoring stability in the Middle East and Arabia (especially neighbouring Yemen). It remains to be seen how Israel sees this development in the context of Iran, given the recent rightward shift of government under Benjamin Netanyahu.
Second, and directly linked, was OPEC’s and Russia’s joint decision last weekend to reduce oil production by 1.2m Barrels/day (roughly 1-1.5% of global production) to try and put a floor under a slipping price in the face of a slowing global economy. The price of Brent Crude promptly jumped 8% back to the mid-$80s/barrel. Saudi is OPEC’s biggest producing member: last summer when oil prices were at all-time highs approaching $150/barrel and Biden was desperate to relieve the pressure on US drivers at the pumps, Saudi firmly rebuffed all US pleading to open the taps and flood the market. However justified the sentiment, Biden’s 2019 campaign insults against Saudi came back to bite him, as has happened twice since, including a few days ago. It is now clear that Saudi is looking after its own interests first which, as one commentator observed, includes an eastward shift in strategic, political and economic emphasis towards potentially faster growth economies still hungry for hydrocarbon fuels, and specifically nurturing ties with China.
And America in the twilight
Since early 1945 and a deal reached before he died between President Roosevelt and the then Saudi King that, in return for securing long-term sources of Saudi oil for the US war effort and its post-war economy, the US would give security assurances to the Kingdom, Saudi has been the most reliable and enduring key ally of the West in this always sensitive and frequently febrile region. Even today, 78% of Saudi defence procurement is satisfied by weapons systems bought from the US (followed by 6.4% from the UK and 4.9% from France). It is not that Saudi is irrevocably hostile to the US (in the way that Iran is, for example), but the level of distrust which has built up over the two Democrat presidencies of Obama and Biden tells them that at best Saudi has no natural support in that quarter and at worst faces outright opposition (on the other hand, in a major diplomatic success for which he received little or no credit, in the latter part of his term President Trump brokered what should have been an enduring diplomatic success, negotiating rapprochement and constructive dialogue between Israel and such disparate states as Saudi, Bahrain, the UAE and Sudan).
But it is notable how significantly geopolitical influences have changed over 50 years, accentuated by the events of the past month: reaching its peak with that consummate shuttle diplomat Henry Kissinger in the 1970s, the US was the powerbroker in the Middle East. There were broader considerations, not least the political influence of the powerful East Coast Jewish lobby in America and concerns for the permanent security of Israel but excusing the pun, crudely it was all about oil and ensuring supplies to the US, then a significant and perpetually thirsty net importer. The US diplomatic influence and that of its allies waned rapidly in the aftermath of the Second Gulf War and the considerable damage inflicted in both Iran and Afghanistan by the outright refusal of successive US neo-Con Secretaries of State to ‘do’ nation building. The disastrous policy mistakes of meddling in the Arab Spring merely added to the problems and allowed Russia and Iran to fill a strategic void. And today we have China actively involved as the rising influence in the region, nurturing relationships, exerting soft power and influence in its strategic self-interest.
But it is notable how significantly geopolitical influences have changed over 50 years, accentuated by the events of the past month: reaching its peak with that consummate shuttle diplomat Henry Kissinger in the 1970s, the US was the powerbroker in the Middle East. There were broader considerations, not least the political influence of the powerful East Coast Jewish lobby in America and concerns for the permanent security of Israel but excusing the pun, crudely it was all about oil and ensuring supplies to the US, then a significant and perpetually thirsty net importer. The US diplomatic influence and that of its allies waned rapidly in the aftermath of the Second Gulf War and the considerable damage inflicted in both Iran and Afghanistan by the outright refusal of successive US neo-Con Secretaries of State to ‘do’ nation building. The disastrous policy mistakes of meddling in the Arab Spring merely added to the problems and allowed Russia and Iran to fill a strategic void. And today we have China actively involved as the rising influence in the region, nurturing relationships, exerting soft power and influence in its strategic self-interest.
Busy times elsewhere in a blizzard of sometimes awkward acronyms: AUKUS; CPTPP; NATO
To complete the picture, the West is making its own moves too, planting flags, putting defensive tanks on others’ lawns. The UK and the US are shifting their strategic priorities to the Indo Pacific region, consummated recently with the formal signing of the AUKUS defence pact with Australia. And last week, Boris’s vision of Global Britain was partially brought to life when the UK joined the Comprehensive & Progressive Agreement for Trans-Pacific Partnership, a free-trade area comprising 11 countries including Japan, Malaysia, Australia and Canada and accounting for £11 trillion of GDP (about 80% of the size of the eurozone but with faster growth). And finally, significantly enhancing NATO’s geographic boot print, Finland becomes the 31st member of the defence pact, creating a new 830-mile direct border with Russia for the Alliance, and geographically in close proximity to the highly sensitive Russian Arctic naval bases at Arkangel and Murmansk in the Kola Inlet, the home of Russia’s Northern Fleet and its strategic nuclear-armed submarine force.
And for investors, it’s all about risk, however ephemeral
The geopolitical tectonic plates are always on the move, mostly imperceptibly, sometimes more than that producing a discernible grumble and very occasionally a seismic thud. Just ask the Ukrainians; they can tell you all about geopolitical earthquakes. But as we have said before, what we are confronted with today as the multitude of complex challenges for investors, i.e. a globally encompassing political and economic event with a military conflict whose epicentre is Ukraine, had its genesis three decades ago when the Soviet Union broke up. Future geopolitical displacements and economic ructions will arise thanks to developments happening today and tomorrow. And yet the yield curve says that over 30 years, with a yield of 3.55% on the US Treasury and 1.36% for its TIPS equivalent (the inflation protected version), a modest low single-digit rate of return is all that is required underpinned by the assumption that the average inflation rate between today and 2053 will be 2.2%. So simple. What can possibly go wrong!
Postscript
The following was picked up as Presidents Xi and Putin parted company at the end of the Chinese leader’s embassy to Moscow last month, and reported in the Spectator: clasping arms, Xi said, “change is coming that hasn’t happened in 100 years and we are driving this change together”, to which Putin replied “I agree”; Xi’s parting comment was “take care, dear friend”. 3.55%? Over 30 years? Go figure.
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The Jupiter Merlin Portfolios are long-term investments; they are certainly not immune from market volatility, but they are expected to be less volatile over time, commensurate with the risk tolerance of each. With liquidity uppermost in our mind, we seek to invest in funds run by experienced managers with a blend of styles but who share our core philosophy of trying to capture good performance in buoyant markets while minimising as far as possible the risk of losses in more challenging conditions.
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