In various of our weekly Jupiter Merlin Weekly musings this year we have highlighted the investment risks posed by the shifting geopolitical tectonic plates between the West and its principal foes and rivals: China, Russia, Iran and North Korea, not to mention other threats posed by international terrorist organisations such as ISIS and Daesh. However innocuous those shifts might appear (though volatile energy prices are all too obvious), they are insidious and pernicious nevertheless and gradually, over time, are reflected in markets and in the behaviour of currencies.


Western alliances are undergoing a period of significant introspection, insecurity and stress. The failure of western policy in Iraq in the aftermath of the Second Gulf War has had serious ramifications for subsequent policy shortcomings in the Middle East (Syria in particular, creating a vacuum filled by Russia and Iran) and NATO’s ignominiously being kicked out of Afghanistan this summer. Further, the dominance of the United States as NATO’s paymaster (it pays 72% of all NATO’s costs and provides even more in the supply of effective military capability) exacerbated by Donald Trump’s bluntly truthful but highly corrosive approach to pointing out the many deficiencies and delinquencies of his allies, as well as Joe Biden’s and Boris Johnson’s creation of the new AUKUS pact with Australia embarrassing France, have all led to significant splits in the alliance.


This has prompted President Macron and the European Commission’s Ursula von der Leyen to make the delusional call to split from NATO and form a new, separate EU defence force. This is leaving aside diplomatic wrangling within Europe about the future relationship between the UK and the EU, and Brussels’ ongoing spats with Warsaw and Budapest and the threat of Article 7 (the suspension of EU voting rights). If Russia and China have been adept at seducing and compromising easy targets (Greece with offers of money after its financial collapse, Hungary with Sputnik vaccines, Turkey with air defence systems, Germany with the Nord Stream 2 pipeline, to name but a few) to break NATO unanimity, NATO members and other allies have been quite unwittingly susceptible to doing Moscow and Beijing’s jobs for them.

The Spook and the Soldier speak

This week it was interesting to hear the perspectives of two key players who are professionally paid to weigh up and deal with the threats. Breaking cover from the shadows for his first public interview was the new head of MI6, Richard Moore, otherwise known as ‘C’. And giving a valedictory interview was the outgoing Chief of the Defence Staff, General Sir Nick Carter. Both covered wide-ranging subjects but boiling down to basics, Moore rates the Secret Intelligence Service’s biggest intelligence challenge as China. From a military perspective, Carter sees the more immediate threat being posed by Russia. Of course in their own very different ways, both countries pose both strategic and systemic threats not only to the UK but to the broader West. Respectively the Spook and the Soldier drew attention to the increasingly acute situations relating to China’s ambitions to see Taiwan being returned to the Motherland either voluntarily or by coercion, and the strategic designs placed on Ukraine by Russia, particularly were Ukraine to join NATO which Moscow would infer as a deliberate act of hostility towards it by Kiev.


There is no hot war, but a new lukewarm war is simmering on a slow but persistent heat. As well as both Russia and China spending heavily on expansion, upgrades and technological developments for their conventional, nuclear and cyber military capabilities, and leading the West in the development of hypersonic missile technology (the Pentagon and other intelligence agencies have expressed genuine surprise at just how far advanced China and North Korea are with hypersonic missile systems, to which the West currently has no defence mechanism, and Russia with its newly demonstrated ability successfully to target and destroy space satellites which renders all the West’s military command and control systems vulnerable to attack), low-level, asymmetric elements are being effectively deployed too. 

Asymmetric warfare 

Those principal areas being ‘weaponised’ are energy, data and migration. It is also not difficult to see that controlling fresh water sources can and will be used as a form of geopolitical leverage too (leaving aside being on the ‘route’ of China’s neo-imperial New Silk Road, the sensitive glacial areas comprising the Himalayas, the Hindu Kush and the Karakoram mountain ranges control the headwaters for major river systems providing fresh water for much of Central Asia and Mesopotamia). As we have seen all too obviously in Europe in the past few months, Vladimir Putin is cynically leveraging western Europe’s reliance on natural gas to his own geopolitical advantage.


If energy is power in every sense, so too is data; whether deliberately interfering in western electoral and democratic processes, or launching cyber attacks on critical national, industrial and corporate information systems, or cracking down on domestic on-line activity in China, the harnessing and manipulation of data allows the exercise of influence and control over countries and populations. Migration too is being used deliberately and cynically to create dissent and instability among target countries. The most obvious example currently is Putin using his Belarusian puppet proxy, Alexander Lukashenko, as the conduit with which to flood economic migrants and vulnerable asylum-seekers across the Polish border into the EU, sowing political dissent and creating tensions. As Brussels takes exception to the influx, Lukashenko is threatening to turn off all gas supplies to the EU. While grabbing the headlines now, this is not a new tactic; for a decade since the Arab Spring and in the ensuing chaos, as a side-line from state-sponsored assassination, Putin’s asymmetric warfare wing the GRU has allegedly been hard at work in Libya facilitating the trafficking of Sub-Saharan migrants across the Mediterranean into southern Europe; there is the suggestion that the GRU was pursuing similar tactics in the Eastern Mediterranean too.

Germany’s new government: big issues

One bastion of relative stability in the West has been the 16-year Chancellorship of Germany’s Angela Merkel. She bows out this week, handing over to the new Traffic Light coalition cobbled together by new Social Democrat Chancellor, Olaf Scholz, together with those unlikely bedfellows the centre-right, business friendly, conservative FDP party, and from the left, the socialist Greens. Despite pushing a 177-page document outlining the agenda of the new government with all the appearances of seamless harmony, there will undoubtedly be tensions. The FDP and the Greens have very different ideas about European integration, and particularly the role of Germany in the eurozone as the de facto underwriter of mutualised debt obligations: conservative fiscal probity against laissez faire Keynesianism is much more than a political dividing line, it is a clash of fundamental principle; interestingly it is an FDP member who will be finance minister.


The other major area of contention, however seductively it is newly wrapped up in green cotton wool and fluffy words, is energy policy. This is the battleground where German domestic politics and international geopolitics potentially meet head-on. The new agenda is the complete removal of coal by 2030, by which time the new government also targets 80% of all Germany’s electricity to be generated from renewables, while maintaining its absolute refusal to entertain the notion of investment in nuclear power. The transition over the next decade will rely heavily on gas, mainly sourced from Russia through the contentious Nord Stream 2 (NS2) pipeline, a subject we have discussed often. The FDP strongly favours NS2, the Greens are deeply in opposition; the SPD has little choice but to be supportive, having been the junior partner in Merkel’s earlier coalition which signed the agreement in the first place (and in a neat twist, Putin pulled off a coup with the appointment of former German Chancellor, Gerhard Schroder, also an SDP member, as Chairman of Gazprom; Gazprom is the corporate entity which physically delivers the project and supplies the gas, and with whom the legal contracts are made).


With the new government about to take office, and against a backdrop of Russia’s clear demonstration of its firm grip on the gas tap responsible for a third of the EU’s energy, America and the UK are renewing diplomatic pressure for NS2 to be abandoned; meanwhile in Poland, Donald Tusk (former President of the European Council and bidding to lead his party in to power at the next general election) has also said this week that NS2 should be abandoned; it is in Poland’s interest for such an outcome as it sees substantial economic damage from the loss of gas transit fees when Nord Stream 1 (NS1) is effectively by-passed. Going back to our original theme, the international weaponisation of energy continues as a means of geopolitical leverage.


But for Germany, one significant question remains: can the world’s fourth-largest economy, one whose trade surplus relies heavily on exports arising from energy-intensive manufacturing industries such as steel production, chemicals and automotive, remain fully competitive with 80% of its energy derived from inherently variable sources of production, and no nuclear, and all within 9 years? Time will tell. In the meantime, the most pressing problem is a national health crisis arising from the pandemic and Merkel’s last deeply divisive diktat as Chancellor that, copying Greece and Austria, covid immunisation will be mandatory in the new year, failure to be jabbed a criminal offence. The UK has no monopoly on dysfunctional health systems.

Ukraine 2022, Czechoslovakia 1938: compare and contrast

But as a parting shot and no pun intended, returning to General Carter’s preoccupation. With tensions extending from the Baltic to the Balkans, as if not enough in an already geopolitically charged region, Russia has sent tens of thousands of troops, and armoured vehicles and aircraft, for military ‘exercises’ hard up against the Ukrainian border. There is no suggestion of an imminent invasion but sometimes situations can get out of hand. But here is the issue: the western allies went to war over Saddam Hussein’s invasion of Kuwait; after 9/11 some of them turned up for Afghanistan though it showed that in reality NATO’s an-attack-on-one-is-an-attack-on-all Article 5 call-to-arms wasn’t worth a bag of nuts; nobody lifted a finger when Hong Kong was annexed by China, completely illegally. Let us pose the question: if the Russians (and Putin and Russia’s armed forces are a very different proposition from Iraq’s in the 1990s) invaded Ukraine, apart from huffing and puffing, freezing assets, expelling some diplomats and spitting out sanctions, would anyone in the West help? 

Ukraine is not (currently) a NATO member, so nobody is obliged to. But morally? Or would the same arguments be trotted out as was the case in 1938 and the Munich Crisis when half of Czechoslovakia, the Sudetenland, was about to be annexed by Hitler: well, you know, it’s so far away, and it’s in the middle of Europe, how could we possibly get there to help and it’s you know, just all a bit difficult; let this one go, old boy, it’s not that important, we’ll catch the next one. Eight decades on; different circumstances, different personalities, different players; same potential dilemma. Hopefully we never find out but relying on hope is no insurance policy; in war there are no silver medals and a place on the podium waving a teddy bear and a bunch of flowers for coming second.


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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Fund specific risks

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