ACPM conference panel highlights geopolitical risks and their impact on pension industry
Canadian pension plan sponsors, administrators, trustees, asset managers and other retirement income system leaders gathered by Okanagan Lake in Kelowna, BC for the Association of Canadian Pension Management (ACPM)’s annual national two-day conference on Wednesday.
The first panel of the day focused on geopolitical risks and their impact on Canadian pension managers. While some highlights of the panel consisted of climate change, disruptive technology and wars as top concerns, one of the main takeaways was centred around the geopolitical risks in four key countries.
Geopolitical risks play a significant role in shaping economies, investment portfolios, and global markets. From the ongoing war in Ukraine to the U.S.-China rivalry and the Middle East's shifting dynamics, the global landscape is evolving rapidly. Understanding these risks and their implications is crucial for businesses, investors, and financial professionals.
Panelists Andrew Bishop, senior partner and global head of policy research at Signum Global Advisors and Jim Gilliand, managing principal, president and CEO of Leith Wheeler Investment Counsel highlighted a few countries that are expected to play critical roles or have the most impact in the geopolitical landscape.
The US
Bishop and Gilliand expressed similar sentiments that the United States remains a major player in global geopolitics. With its upcoming 2024 November election, U.S. foreign policy under the next administration will be pivotal. The U.S. election outcome will influence not only America's foreign policy but also the global order. Bishop notes that the foreign policy approaches of a Trump administration versus a Harris administration could have very different implications.
“She's likely to be much more hawkish than the Biden administration on the issue of Russia and Ukraine, and specifically, her team is willing to push against Russia compared to Jay Sullivan, the National Security Advisor to Biden,” explains Bishop. Additionally, while Harris has no connection to Asia, it “creates a blank slate,” he says. “Her advisor’s approach is much more military, so it's more about containing China by working with Japan, South Korea, the Philippines, etc.”
A Trump administration, meanwhile, could prove to end the Russian-Ukraine war, Bishop says. While there are many morally negative factors in Trump’s plan, it is ironically “a plan that Russia is more likely to have problems with than Ukraine,” says Bishop, because it mandates the end of the war and will guarantee security to Ukraine.
While Trump could pose to be a major economic threat to China, Bishop believes the bigger target for the Trump administration is going to be Europe. “One of the big differences between the two is that his approach to China remains transactional, whereas his approach to Europe is essentially punitive,” says Bishop. “I expect Europe will be the biggest economic loser of a Trump administration.”
Additionally, the US’ dollar's reserve currency status provides our neighbours to the south with unique advantages in terms of debt sustainability, says Gilliand. “The US has a unique situation. It’s that reserve currency. It's generating huge current account deficits through trade, and those come back to the US from capital count through the currency. That also helps that debt sustainability."
China
China also remains one of the most significant geopolitical players, both as an economic powerhouse and as a source of risk. While the looming possibility of conflict over Taiwan is one of the most underestimated global threats today, China’s economy is also under strain due to a housing bust, near-zero inflation, and high savings rates, Gilliand highlighted.
“Overall, the Chinese economy is challenged, and that obviously increases political risk,” he says. However, Gilliand notes that China's influence hasn't shrunken as much as one might think. “The reason is that their exports have increased to trade partners in Asian nations. When you see Vietnam and South Korea increasing, a lot of that is Chinese goods that are then getting remanufactured and exported from there.”
The possibility of a Chinese invasion or blockade of Taiwan also remains a critical concern. Bishop suggests that a blockade might be worse for markets than an invasion, as it would disrupt supply chains without offering a clear resolution. “A long blockade at the end of which Taiwan remains independent is way worse for markets than a two-day invasion where China wins,” he says. “China isn’t going to try to tame the global economy by halting all exports of semiconductors.”
The Middle East
The Middle East remains a volatile region, with events in Saudi Arabia, Iran, and Israel playing pivotal roles in shaping global energy prices and security. In March 2023, Saudi Arabia, under Crown Prince Mohammed bin Salman, sought to de-escalate tensions with Iran to secure its Vision 2030 economic goals. However, the Oct. 7, 2023 conflict between Israel and Hamas has complicated this effort, Bishop explains.
“Saudi Arabia came to the realization that if they didn’t appease Iran, Iran would continue to attack Saudi Arabia, and it would be impossible for Saudi Arabia to develop into the economy that wants to become,” he says. However, the attacks on Israel have made it politically impossible for Saudi Arabia to continue its rapprochement with Iran. This volatility could affect global oil prices, explains Bishop and Gilliand, especially if Iranian-backed groups target Saudi oil infrastructure.
Consequently, while the U.S. has made significant strides toward energy independence, reducing its reliance on Middle Eastern oil, Middle Eastern instability still poses risks to global energy markets, particularly in the event of a major conflict involving key oil-producing nations.
Europe
Europe also faces significant economic and demographic challenges that could further destabilize the region. Gilliand asserts that immigration has become essential for maintaining Europe’s population growth, particularly in countries like Germany, which would see a 15 per cent population decline without it. He believes all of Europe “has hit the 2040 period already,” referring to the demographic shift that could result in shrinking labor forces and slower economic growth.
In addition to demographic challenges, Europe remains vulnerable to Russian interference, particularly in Eastern Europe. While a direct Russian attack on NATO is unlikely in the short term, Bishop says, “At the margins, in terms of erosion of investor confidence, I think it’s already there.”
