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Mission Grey Daily Brief - September 05, 2024

Summary of the Global Situation for Businesses and Investors

The global situation remains dynamic, with a range of developments impacting the geopolitical and economic landscape. China's assertive actions in the Indo-Pacific region are testing US commitments to allies, while Brazil's stance against Elon Musk's social media platform X highlights ongoing tensions over free speech and misinformation. Egypt faces a delicate balance between implementing IMF-mandated reforms and managing citizen discontent. Meanwhile, Kazakhstan is leveraging digital advancements and multilateral initiatives to enhance its standing as a middle power in Central Asia.

China's Assertiveness in the Indo-Pacific

China has increased its maritime and aerial operations near the Philippines, Japan, and Taiwan, testing the US commitment to allies in the Indo-Pacific. This includes collisions between Chinese and Philippine coast guard vessels near Sabina Shoal and breaches of Japanese airspace. Analysts suggest that China aims to signal its willingness to counter US influence in the region.

The US and its allies have issued statements condemning China's aggression. However, some experts argue that more forceful measures are needed, including increased naval presence and sanctions.

Risks and Opportunities:

  • Risk: Businesses operating in the region face heightened geopolitical risks and potential disruptions to their operations.
  • Opportunity: Companies in the defense and security sectors may find opportunities in enhanced military cooperation and investments.

Brazil's Feud with Elon Musk

Brazil's President Luiz Inácio Lula da Silva has criticized Elon Musk's social media platform X for spreading misinformation and far-right ideology. Brazil's Supreme Court ordered the suspension of X in the country due to Musk's refusal to appoint a legal representative. This follows previous orders to block accounts affiliated with Bolsonaro's right-wing party and activists accused of undermining Brazilian democracy.

Musk, a self-proclaimed "free speech absolutist," has framed the court's actions as censorship, resonating with Brazil's political right.

Risks and Opportunities:

  • Risk: Businesses operating in Brazil's digital and social media sectors may face increased regulatory scrutiny and public backlash.
  • Opportunity: Platforms that prioritize transparency and moderation could gain user trust and market share.

Egypt's Economic Reforms and Social Tensions

Egypt faces a challenging path as it implements stringent IMF-mandated reforms to secure remaining tranches of its $8 billion loan. The liberalization of the Egyptian pound has caused a dramatic increase in commodity prices, negatively impacting tens of millions of Egyptians, especially the poor and middle class. This could lead to political and security backlash in a country already facing regional conflicts.

Egypt is also partnering with Qatar to negotiate an end to the war between Israel and Hamas, with over 2 million Palestinians lacking basic needs.

Risks and Opportunities:

  • Risk: Businesses operating in Egypt may encounter social unrest and economic instability, affecting their operations and supply chains.
  • Opportunity: Companies providing essential goods and services, particularly in health and education, may find opportunities in government spending to support Egyptian families.

Kazakhstan's Rise as a Middle Power

Kazakhstan is solidifying its position as a middle power in Central Asia through economic strength and strategic foreign policy. It is one of the 30 most digitalized countries globally, with advanced plans for 5G networks and artificial intelligence. The country is also hosting the Asia-Pacific Ministerial Conference on Digital Inclusion and Transformation, fostering more inclusive digital economies in the region.

Additionally, Kazakhstan is enhancing multilateral initiatives, such as the Digital Silk Road project, to expand data collection infrastructure and attract major tech companies.

Risks and Opportunities:

  • Opportunity: Kazakhstan's digital advancements present opportunities for tech companies to collaborate and tap into new markets.
  • Opportunity: Businesses can benefit from Kazakhstan's growing influence as a regional leader and its commitment to multilateral cooperation.

Further Reading:

Analysts: China tests US commitment to Indo-Pacific with maritime operations - VOA Asia

Brazil’s president says world doesn’t have to put up with Elon Musk’s ‘far right’ ideology just because he’s rich - CNN

Bridging Digital Divide: Asia-Pacific Nations Convene in Astana - Astana Times

Egypt's dilemma: Back out of IMF reforms or anger its citizens - The New Arab

Erdoğan to host Egyptian President el-Sisi in Ankara - Hurriyet Daily News

Experts Weigh in on Rise of Middle Powers in Central Asia, Highlight Greater Agency - Astana Times

Themes around the World:

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Economic Growth Forecast Cut

The International Monetary Fund (IMF) slashed Japan's 2024 growth forecast to 0.3%, the lowest since the pandemic, citing auto supply disruptions and the fading of one-off factors like a tourism boom. This cut is significant among major economies and may impact investment strategies.

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Shipping and Trade Resilience

Despite Russia's intensified attacks on Ukrainian ports and ships, shipping operations continue, demonstrating the resilience of Ukraine's seaborne trade. Companies like Maersk, Hapag-Lloyd, and HHLA remain committed to operating in the region, signaling a strong will to keep trade flowing.

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India's Growth Projection

The International Monetary Fund (IMF) maintains India's growth projection at 7% for FY25, a drop from 8.2% in 2023 due to exhausted pent-up demand post-pandemic. The projected growth rate is considered 'relatively mediocre' by the IMF, which recommends structural reforms to increase productivity and resilience.

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US Tariffs and Trade

US firms are bracing for potential tariffs as the election approaches, with Trump proposing a 10% tariff on imports and up to 60% on Chinese goods. This has caused uncertainty and a dampening effect on investment, and may lead to higher prices for consumers.

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Resilience of Ukraine's Seaborne Trade

Despite intensified rocket attacks on civilian ships and ports, Ukraine's seaborne trade remains resilient. Companies like Maersk and Hapag-Lloyd have resumed or continued operations, signaling a bold move to enhance efficiency and interaction with the Ukrainian market. This comes with increased risks and costs, including high insurance premiums and concerns about the safety of vessels in Ukrainian waters.

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General Election Impact

Japan's upcoming general election on October 27 may impact the country's economic policies and market performance. There is uncertainty about the outcome, with the possibility of PM Ishiba's new government losing control of parliament. The election also contributes to the cautious stance of the Bank of Japan (BoJ) regarding further interest rate hikes in 2024.

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RegTech Industry Growth

The UK's RegTech industry is expected to grow by 24.9% annually, reaching US$657.84 million in 2024. Technological advancements and regulatory pressures drive this growth, with organizations seeking innovative solutions for compliance and risk management. The UK RegTech sector has the potential to become a global leader in regulatory innovation.

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US-Israel Relations

The US is Israel's major ally and biggest supplier of arms, with 69% of Israel's arm imports coming from the US in 2023. However, the US has warned Israel that it may stop supplying weapons if the humanitarian situation in Gaza does not improve, threatening to halt shipments if Israel invades the southern city of Rafah.

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Western Military Aid to Ukraine

Ukraine has received military aid, including weapons and fighter jets, from Western countries to support its defense against Russia. However, experts warn that many of these weapons may not survive the war if used to their maximum potential. The West needs to be prepared for potential losses while understanding that the support is crucial for Ukraine's victory.

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Consumer Confidence Crisis

China is facing a consumer confidence crisis, with low spending and consumption rates. Despite official messaging of optimism, consumers remain cautious, impacting economic growth. The COVID-19 pandemic and lockdowns, as well as the property market crisis, have contributed to this lack of confidence.

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Record-high deficit and debt

France's financial future is under scrutiny as credit rating agencies assess the country's ability to manage its debt. The country faces a record-high deficit of €167 billion, or 5.5% of GDP, and national debt is projected to reach 114.7% of GDP, exceeding EU limits. This has led to political turmoil and uncertainty for investors, with potential impacts on borrowing costs and the country's vulnerability to market speculation.

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Foreign Investment Dynamics

Despite calls for 'de-risking', EU investments in China reached a new quarterly record of US$3.9 billion in Q2 2024, led by German carmakers. Meanwhile, some companies are shifting their strategies and reducing operations in China due to the challenging business environment and consumer spending curbs.

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Military Equipment Shortage

Ukraine's Western partners have supplied fighter jets and tanks in small numbers, and Ukraine is unable to acquire certain desired equipment, such as Sweden's Gripen jets, which are better suited to the conflict than the US-made F-16s. Ukraine is also facing challenges in its domestic weaponry manufacturing due to a lack of funding.

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Electric Aircraft Manufacturing

German electric aircraft manufacturer Lilium is facing financial challenges, with its subsidiaries filing for insolvency and self-administration proceedings. This is due to the German government's failure to approve a crucial loan, impacting market confidence and future investments. The company is now focusing on insolvency proceedings to preserve its business.

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Banking and Lending Environment

German firms are struggling to secure loans due to economic uncertainty and banks' hesitancy. This limits business investments and job creation, impacting economic growth. However, there is anticipation that the European Central Bank's monetary policy decisions could improve lending conditions and stimulate economic activity.

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India's Trade Position

India's trade position is evolving, with a focus on reducing tariffs and easing FDI restrictions to capitalise on global supply chain shifts. India's average tariff rate is above 15%, impacting its Logistics Performance Index ranking. The country is poised to benefit from the 'China Plus One' strategy, attracting manufacturing and sourcing diversification by global companies.

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India-Canada Diplomatic Tensions

The recent breakdown in diplomatic relations between India and Canada over accusations of Indian government agents' involvement in murder and extortion in Canada raises concerns for bilateral trade and immigration ties. Uncertainty surrounding the future of the relationship may impact business opportunities and the movement of people between the two countries.

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Controversial sale of Sanofi's Opella

The planned sale of a controlling stake in Sanofi's consumer healthcare arm, Opella, to a US private equity firm has sparked controversy in France. Politicians and unions from across the spectrum warn of a "loss of sovereignty" and risks to manufacturing jobs and supply chains. The French government has responded with penalties for offshoring and agreements to maintain production and jobs in France, while also welcoming foreign investment in the medicine sector.

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International Business Relations

Israel's relations with other countries, including the US, Germany, Italy, and the UK, impact its access to weapons and military aid. While the US has been Israel's primary ally, other countries have reduced their military aid. India's Tata Group has also faced backlash for its business relationships with the Israeli government, including manufacturing weapons and providing IT services for the military.

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Military Buildup and Geopolitical Tensions

Japan is in the midst of its largest military buildup since World War II, with a $320 billion plan that includes long-range missiles capable of hitting targets in China, North Korea, and Russia. This shift in policy has led to cyberattacks from Russian-linked hacking groups, targeting Japanese logistics, shipbuilding, manufacturing, and government agencies.

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Cybersecurity Threats

The UK faces a surge in ransomware attacks, with data breaches reaching record highs. However, the number of incidents investigated by the Information Commissioner's Office (ICO) has dwindled, raising questions about its capacity to address the issue. The British government has pledged to introduce a Cyber Security and Resilience Bill to expand existing laws and increase mandatory incident reporting.

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US-China Trade Tensions

Tensions between the US and China have impacted trade and investment. The US has imposed sanctions and tariffs on China, while China has been accused of economic manipulation and intellectual property theft, creating challenges for companies operating in both markets.

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Political Turmoil and Budgetary Challenges

France's political landscape is marked by a hung parliament and fierce budget debates. The new government's plans to tackle the deficit with tax hikes and spending cuts have sparked an outcry from left-wing lawmakers and unions, who argue that these measures will unfairly impact low-income families, apprentices, retirees, and small businesses. The government's survival hangs in the balance.

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Economic Growth and Inflation

Japan's economy is facing both positive and negative pressures. The yen's depreciation has made Japanese assets more attractive, boosting mergers and acquisitions. However, there are concerns about the impact of rising prices and wages on businesses, especially small firms. The central bank has cautioned against premature interest rate hikes, citing global uncertainties and the potential impact on inflation and wage growth.

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Thailand's Economic Transition

Thailand is transitioning its economy towards environmentally sustainable practices. The United Nations estimates an annual investment need of 400-500 billion baht in industries facilitating this transition. The Bank of Thailand (BOT) and the Securities and Exchange Commission (SEC) are implementing a classification system, with activities categorized into green, yellow, and red based on their environmental impact. This provides clarity for investors and has led to the introduction of green financial products such as green bonds and loans.

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Geopolitical Risks and Sanctions

Geopolitical risks, particularly those associated with Russia's war in Ukraine, are a key concern for UK businesses. The UK has imposed sweeping sanctions on Russia's shadow fleet of oil tankers, targeting illicit oil exports. These sanctions are part of coordinated efforts with the US, Canada, and European nations to neutralize the threat posed by the shadow fleet to international trade and maritime safety.

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Tax Policy and Talent Drain

The new Labour government's planned tax increases, including a potential rise in capital gains tax, have sparked concerns about a brain drain, with tech entrepreneurs and investors considering relocation to countries like the UAE. This could impact the UK's attractiveness for starting and scaling high-growth businesses.

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Energy and Trade Shifts

Germany's energy landscape has changed due to the Russia-Ukraine conflict, impacting its economy. Exports to China, previously its biggest trading partner, have fallen, and Germany is losing its grip on trade and manufacturing. However, Germany's new cannabis law is expected to drive substantial growth in the European cannabis market.

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Intellectual Property Theft

China has been accused of intellectual property theft, estimated at $600 billion annually from the US alone. This has contributed to China's economic dominance and exploitation of global markets, often disregarding human rights and property protections.

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Western Military Aid Uncertainty

The future of Western military aid to Ukraine is uncertain due to the upcoming US presidential election. Both candidates have been vague on their Ukraine policies, with Republican candidate Donald Trump expressing skepticism about further support.

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Capital Market Activity

India's capital market is seeing increased activity, with 336 companies going public in Samvat 2080, dominated by SMEs. There is a wave of retail enthusiasm for SME IPOs, with many offerings oversubscribed by substantial margins. This has expanded the investor base, with registered demat accounts reaching the 17-crore mark. The IPO mania has also attracted global corporations seeking public listings in India.

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Energy Security

The UK is transitioning to low-carbon electricity sources and increasing energy imports, reducing the risk of winter blackouts. However, heavy reliance on gas and insufficient progress in insulating homes and scaling heat pumps leave the country vulnerable to energy price shocks and surging energy bills.

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China's Growing Influence

Georgia's new strategic partnership with China marks a shift in foreign policy. While it offers economic opportunities, it raises concerns about its impact on Georgia's EU integration and relations with Western allies. China's stance on the Ukraine war and its pseudo-neutrality are also questioned.

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US-China Trade Diversification

The US is restricting investments into strategic sectors in China, prompting global companies to diversify their supply chains beyond China. India stands to benefit from this shift, particularly in the pharmaceutical and electronics industries, as it has a sophisticated industrial base and skilled workforce.

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Political Stability

India's political stability is a key factor in its attractiveness for sourcing apparel, according to the US ITC. This stability, along with vertical integration and skilled labor, has made India the fourth-largest supplier of apparel to the US, overtaking China.

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Economic Slowdown and Recession

Germany is facing a prolonged economic slowdown and a second consecutive year of recession, with a predicted 0.2% decline in GDP for 2024. High inflation, interest rates, and weak export demand, along with structural issues like an aging population and bureaucratic inefficiencies, contribute to this downturn.