How the geopolitics of natural resources will lead to more re-ratings of financial markets

Horizons article
December 19, 2023

In our time of increased self-sufficiency, in which different countries aim to reduce their dependence on each other (one of the themes in our Balanced Future Certificate), investors have already seen and are likely to see more events centered around natural resources. The war in Ukraine, for example, disrupted the distribution of oil, gas and food, which triggered higher inflation globally. In the conflict between the US and China, the latter’s domination of rare earth metals is an important topic (because of their use in electronics and renewable energy sources). A more recent example is that the US decided to allow Venezuela to re-enter the global oil market, which forced emerging market fixed income investors to reconsider the investability of Venezuelan bonds.

Although there is a lot of attention for geopolitics these days (defined as geography shaping political decision-making), the way in which geopolitics is relevant to financial markets is an entirely different question. In his book Geo-economics: the interplay between geopolitics, economics and investments (2021), the writer and investor Joachim Klement offers an interesting perspective on – among others – the geopolitics of natural resources. He highlights two types of natural resources that investors should pay special attention to: energy and data.

Klement presents many examples of how the geopolitics of energy have affected financial markets, but especially interesting is the rise of the US oil industry. American crude oil production (the fracking boom) has completely changed the way oil affects the American economy. In the early 2000s, an oil price shock would lead to a decline of private investment in the US by up to 6% over 3 years. Today, a 1% oil price shock is likely to lead to an increase (!) in investment of 5% over 3 years. Indeed, despite the well-known importance of the US fracking boom, it still seems to be an underestimated force in financial markets. For example, the famed investor Pierre Andurand’s main hedge fund, after an impressive 3 year stint, is currently heading for its worst loss on record (-54%) because of the expansion of US oil output that kept oil prices low. Andurand, like many, expected oil prices to rise significantly this year. The following graph tells the story:

Source: U.S. Energy Information Administration

Another insight from Klement is that metals, which are key to the energy transition, are only truly relevant for major metal-producing countries like Australia, Chile and Peru. Indeed, the price shocks of metals do not significantly affect other countries. Most importantly, there are major differences between these metals producers. Chile for example is highly dependent on a single commodity: copper (50% of its exports), which has a rich history of price manipulation leading to price shocks that distort markets. Australia, meanwhile, has a more diversified commodity market, which means price shocks in commodity markets affect the Australian economy much less than Chile.

Klement suggests that the geopolitics of data (which can be understood as a natural resource because data is abundant and must be extracted, collected and processed to create value) will become a much more important force in financial markets in the coming years. He focuses on cybersecurity and illustrates how it will become more important for investors to identify the types of companies that are vulnerable if conflicts between countries intensify. Indeed, Klement shows that businesses, more so than governments, are targets of cyber-attacks. These attacks are also concentrated in specific industries. For example, annually 82% of biotech and pharmaceutical companies are the target of cyber-attacks. These attacks cause significant disruptions to these businesses. Take these three different examples:

  • In 2011, Sony suffered a data leak that affected Playstation gamers, which led to a 31% decline of its share price over 6 months. Interestingly, a 2014 leak of employee data did not affect Sony’s share price at all.
  • In 2013, hackers installed malware in 1800 Target stores, which led to a decline of the company’s profits by 46% in the following quarter.
  • In 2015, the theft of T-Mobile customer data led to long-term underperformance as the trust of customers was undermined.

To conclude, in recent years, the geopolitics of natural resources has shown that countries and companies with key endowments (such as energy, metals and data) will, in the case of an event centered around these resources, be perceived differently by financial markets. Indeed, the likeliness of such events is growing as conflict between countries is intensifying. For investors, it will become more important to identify how countries and companies are positioned, for better or worse, within this dynamic.


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