Geopolitics

Global semiconductor demand will continue contracting, even though the pace of decline will moderate in 2023H2. While demand has increased briskly for Artificial Intelligence-type semiconductors, this will not be enough to lift aggregate global chip sales out of contraction. While momentum could push Emerging Asian semiconductor stocks higher in the short term, their share prices are vulnerable to the downside due to shrinking demand.

Slowing manufacturing PMI indices globally indicate the slowdown in economic activity will persist. Manufacturing demand for commodities will also soften, weighing on industrial commodity prices. Geopolitical tensions and the race to the green energy transition will upend enmeshed global supply chains, which will also impact manufacturing activity. It is possible that stimulus in China will arrest the decline in the state’s manufacturing activity, which will have positive spillover effects to its key trading partners.   

Expectations for oil demand growth through 2023-24 are way too optimistic. Until these expectations fall to -0.5-1 percent, the oil price has further downside. Plus: collapsed complexity confirms that AI is in a mania, while basic materials stocks and ZAR/EUR are rebound candidates.

President Erdogan and the Justice and Development Party emerged as the winner of the Turkish general election which was concluded yesterday. This victory means that their expansive policies of the past decade will continue, and Turkish assets will suffer. Across the Aegean, the Greeks voted to reelect the New Democrats under the leadership of Prime Minister Mitsotakis. Their fiscal prudence and structural reforms will be continued as voters had rewarded them with another term in office. Go long Greek versus Turkish equities.

The debt ceiling game’s endpoint will avoid default only if it implies economic pain. For the Republicans, the best strategy is not to lift the debt ceiling unless the Democrats cut spending a lot, or unless the economy starts to tank. Plus: there are signs that the mania in ‘AI’ stocks has gone too far too fast.

Investors should expect high volatility and a selloff in US stocks over the short run due to the higher-than-usual risk of technical default. Investors should seek shelter in defensive sectors and large cap stocks. Long-dated Treasuries will see yields fall due to the overall macro and geopolitical context even though short-dated Treasuries will continue to suffer from policy uncertainty.

In this *Special Report*, we analyze the dollar’s reserve status within the context of geopolitical crosscurrents. In our view, there is more than meets the eye when betting on the end of the dollar’s reserve status.