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Mission Grey Daily Brief - June 21, 2024

Summary of the Global Situation for Businesses and Investors

The global situation remains complex, with ongoing geopolitical tensions and conflicts continuing to pose risks and challenges for businesses and investors. Notable developments include the intensifying Russia-Ukraine conflict, rising tensions in the South China Sea, and economic growth in Cambodia. Meanwhile, countries like Iraq are facing extreme heatwaves, and the BBC faces internal turmoil over its coverage of the Israel-Hamas conflict.

Russia-Ukraine Conflict

The conflict between Russia and Ukraine continues to escalate, with Russia's invasion of Ukraine leading to its growing isolation. In an attempt to gain international legitimacy, Russian President Vladimir Putin visited North Korea and Vietnam, signing a defense pact with North Korea and seeking to strengthen military and economic cooperation. This has raised concerns among South Korea, Japan, and China, potentially leading to a bolstered military presence by the US and its allies in the region. Romania has also donated a US Patriot missile defense system to Ukraine, highlighting the ongoing regional security repercussions.

South China Sea Dispute

The territorial dispute in the South China Sea between the Philippines and China has intensified, with the Philippines releasing photos of a military-grade laser pointed at one of its ships by China. The Philippines has adopted a transparency policy, publicizing China's actions and deepening its military alliance with the US. This has constrained China's ability to escalate the situation but has also raised the risks of economic retaliation and increased the possibility of US involvement. The conflict is centered on Scarborough Shoal and Second Thomas Shoal, with the Philippines maintaining a rusting warship to reinforce its sovereignty claims.

Economic Growth in Cambodia

Cambodia is experiencing a bullish outlook on economic growth, attracting increased foreign direct investment (FDI) from Singapore companies. Singapore has been a pivotal partner in Cambodia's development, with investments in various sectors such as manufacturing, real estate, and hospitality. Cambodia's progressive economic roadmap and ease of doing business have drawn Singapore companies, particularly in sectors like green energy, healthcare, and agri-food. The Cambodia-Singapore Business Forum highlighted the potential for further collaboration in renewable energy and sustainability.

Extreme Heat in Iraq

Iraq is currently facing a heatwave, with temperatures exceeding 50 degrees Celsius in several provinces. This has prompted the Iraqi government to issue warnings against direct sun exposure and recommend that people stay indoors during peak heat times. Iraq regularly experiences scorching summers, and the government occasionally grants holidays to its institutions during such heatwaves.

BBC Turmoil Over Israel-Hamas Coverage

The BBC is facing internal turmoil and public criticism over its coverage of the Israel-Hamas conflict, with accusations of bias from both sides. The situation has led to employment disputes, letters to management, and investigations into editorial errors. There are also concerns about the tone of coverage, dehumanization of Palestinian deaths, and the failure to provide "unfettered access" to Gaza for foreign media. The conflict has spilled over into a dispute between BBC employees and management, with accusations of antisemitism and censorship.

Recommendations for Businesses and Investors

  • Businesses with operations or investments in Vietnam should be cautious about potential economic repercussions from the country's association with Russia. Vietnam's relationship with the US may be strained, and companies should monitor the situation and be prepared for potential shifts in trade policies.
  • Companies operating in the South China Sea region should be aware of the escalating territorial dispute between the Philippines and China. The situation poses risks of open hostilities and economic coercion, which could impact supply chains and business operations.
  • Investors interested in Cambodia should consider the country's progressive economic roadmap and improving business environment. The growing FDI and collaboration in sectors like green energy and digitalisation present attractive opportunities for businesses.
  • Businesses with operations in Iraq should anticipate potential disruptions due to extreme heatwaves. The heatwaves can impact productivity and supply chains, and companies should implement measures to mitigate the effects, such as adjusting working hours or providing additional resources to ensure employee safety and well-being.
  • Media and communications companies should pay close attention to the BBC's handling of the situation, particularly regarding accusations of bias and censorship. The outcome of this turmoil may have broader implications for the industry and how news organisations navigate sensitive geopolitical conflicts.

Further Reading:

3 Takeaways From Putin's Trip to Vietnam - The New York Times

Breaking News: Romania donates a US Patriot missile defense system to Ukraine - Army Recognition

Bullish outlook on economic growth in Cambodia spurs FDI from S'pore companies - The Straits Times

Employment Disputes, “Egregious” Letters & Editorial Errors: Inside BBC Turmoil Over Israel-Gaza - Deadline

Extreme heat hits Iraq as temperature exceeds 50 degrees Celsius - Social News XYZ

Friday Briefing: Vladimir Putin Visits Vietnam - The New York Times

In South China Sea dispute, Philippines' bolder hand tests Beijing - Yahoo! Voices

Israel-Hamas War Updates: Divisions Between IDF and Netanyahu Spill Into Open - The New York Times

Israeli drone strike kills military officer in Syria - Social News XYZ

Kim Jong Un gives Putin lavish welcome to North Korea and vows 'full support' for Ukraine war - Yahoo! Voices

Themes around the World:

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International Sanctions

International sanctions on Russia and China have been a pivotal component of the conflict, reshaping global trade and financial flows. While sanctions aim to pressure and weaken Moscow, countries have sought loopholes and workarounds to mitigate their economic impact, such as the case of Kyrgyzstan's MBank partnering with Russia's sanctioned Sberbank.

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US Economic Exceptionalism

The US dollar, equities, and yields are experiencing gains due to US economic exceptionalism, reduced Federal Reserve easing, and improved polling for Trump. This has resulted in volatile trading, with the US dollar securing consecutive weekly gains and gold reaching an all-time high. A Trump victory is expected to impact global trade and reduce Fed rate cuts.

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Property Market Crisis

China's property market is in crisis, with falling prices, stalled growth, and developers collapsing. The government has responded with stimulus measures, including a 'whitelist' of projects eligible for financing, but these efforts have not fully restored confidence among investors and analysts.

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Automotive Industry Crisis

The automotive industry, a key sector for Germany, is facing significant challenges. Volkswagen, a major manufacturer, plans to shut down factories and cut jobs due to weak sales and competition from Chinese manufacturers in the electric vehicle (EV) market. German carmakers are also facing pressure from Donald Trump's trade policies, threatening tariffs on vehicles not produced in the US, and the potential loss of subsidies for EVs.

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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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China's Africa Strategy

China's Belt and Road Initiative activities in Africa focus on infrastructure and resource extraction. Political instability in Africa poses challenges to China's investments and may force a shift from its non-interference policy. African leaders are advised to diversify economic relationships to avoid becoming victims of Chinese neocolonialism.

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Healthcare sector challenges

France's healthcare sector faces challenges with medication shortages and a reliance on overseas suppliers, exacerbated by the COVID-19 pandemic. The government has provided subsidies to drugmakers to reshore medicine production, particularly for critical medicines like paracetamol. The sale of Sanofi's Opella unit has highlighted the importance of securing supply chains and maintaining control over the production of essential medicines.

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US Presidential Election

The upcoming US presidential election between Donald Trump and Kamala Harris is causing economic uncertainty, with businesses postponing investments until after the vote. Trump's proposed tariffs are expected to increase prices and impact global trade, while Harris's plans are seen as less extreme. The election outcome will shape US economic policy and global market trends.

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US-China Tech Race

China has dominated the battery industry for over a decade, while the US lags with limited competitiveness. China controls the supply chain for lithium-ion batteries, but the US aims to secure next-generation technology with solid-state batteries, investing heavily in domestic production.

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Inflation and Jobs

Inflation is a key concern for US voters, with prices remaining high despite a drop in the inflation rate. The job market is strong, but long-term issues persist, impacting specific worker groups. Wages have grown faster than inflation, helping households manage rising prices. The election outcome will influence economic policies addressing these issues.

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Financial Management Challenges

UK finance leaders struggle with global spend and expense management due to disconnected tools and manual processes, hindering their ability to manage global growth and relationships with suppliers. This issue is prevalent, with 90% of companies acknowledging the inefficiency and unreliability of their current systems, impacting their negotiations and payments.

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Humanitarian Crisis in Gaza

The ongoing conflict and bombardment in Gaza have resulted in a dire humanitarian crisis, with limited access to food, water, and medical care. Israel is considering the use of private security contractors for aid delivery, but critics argue that this could be seen as a tactic to drive out the Palestinian population.

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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 to acquire long-range missiles that can target China, North Korea, and Russia. This shift in policy has led to increased geopolitical tensions, especially with Russia, which has resulted in cyberattacks on Japanese government and industrial targets by Russian-linked hacking groups.

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Biometric Screening in Gaza

Israel is considering a plan to implement biometric screenings for Palestinians in Gaza to receive aid, raising concerns about privacy and surveillance.

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Industrial Strategy and Regional Inequality

The UK government's new industrial strategy aims to steer the economy through the 21st-century challenges. While the strategy includes welcome initiatives such as addressing infrastructure issues and investing in broadband, electricity supply, and clean energy, it falls short by not adequately addressing Brexit's impact on trade with the EU and the potential widening of regional inequality due to a technology-centered approach.

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Strong Economic Growth

India's economy is projected to grow at 7% in the current fiscal year and 6.5% in the next. This growth is driven by domestic manufacturing, infrastructure development, and financialization. The country's economic reforms and growing middle class have propelled companies like HDFC Bank onto the global stage.

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Foreign Investment Surge

Thailand has seen a 42% year-on-year surge in foreign investment applications, reaching US$21.7 billion in the first nine months of 2024, the highest in a decade. This reflects growing confidence in the Thai government's policies and improved business regulations. Foreign investors play a significant role in the Thai stock market, impacting liquidity, market sentiment, exchange rates, sectoral dynamics, and long-term stability.

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Global Manufacturing Decline

The global manufacturing industry is weakening, with major regions like the US, Eurozone, and China experiencing declining activity. This is causing supply chain problems and affecting employment and investment.

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Economic Slowdown and Mismanagement

China's economy is facing a slowdown due to falling prices, high local-government debt, declining business and consumer confidence, and a struggling property market. Beijing's stimulus efforts, including monetary easing, government spending, and investment incentives, have been criticized as insufficient and lacking detail, with analysts predicting a continued slump in the property sector and potential global recession.

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Geoeconomic Fragmentation Impact

Geoeconomic fragmentation is altering trade patterns and financial vulnerabilities in the ASEAN+3 and euro area regions. Thailand, as part of ASEAN, has positioned itself as a regional "connector", benefiting from changing global dynamics and enhancing its export advantages. This has particularly impacted China's export activities and increased financial exposure for the euro area.

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Impact of Sanctions

Western sanctions on Russia are having a significant impact on its economy and ability to wage war. The US has sanctioned Chinese and Russian entities involved in providing military technology to Russia. These sanctions target the supply chain of dual-use items, which can be converted into military items. The war has also reshaped global trade and financial flows, with countries seeking loopholes to mitigate the economic impact.

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Aging Population

The aging populations of Japan and China present challenges and opportunities. Japan has made strides in adapting with policies and investments in healthcare, pharmaceuticals, and eldercare services. This has resulted in a robust 'silver economy', with leading companies in healthcare, eldercare, and technology. Japan's success provides opportunities for cooperation and collaboration with China.

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High-Speed Train Market Competition

France has opened its high-speed train market to competition, allowing domestic and international operators to offer alternatives to the national carrier, SNCF. This change is expected to improve service, accessibility, and comfort for passengers, with new direct routes and affordable tickets. However, there are concerns that operators might focus only on profitable routes, limiting scheduling options and impacting less profitable lines.

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US-China Tech Competition

The US and China compete in semiconductor technology, with China designing around US export controls and sanctions. This may lead to a shift in semiconductor supply chains away from the US, impacting US company revenues and intensifying the tech rivalry between the two countries.

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Global Manufacturing Woes

The global manufacturing industry is weakening, with major regions like the US, Eurozone, Japan, and China experiencing declining activity. This is causing supply chain problems and delays, especially in the Eurozone, while countries like the UK and India are showing modest growth.

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Economic Impact of Geopolitical Tensions

The conflict between Israel and Iran, coupled with the Israel-Palestine tensions, has led to a volatile moment for oil markets, causing price increases. This affects not only the cost of oil but also the broader economy, including capital flows, jobs, imports, and exports. The situation has also disrupted global trade routes, with international shipping companies avoiding certain areas due to security concerns.

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Foreign Investment Opportunities

Japan is attracting more foreign investment, with investors like Warren Buffett shifting their focus from China due to its economic and geopolitical risks. Japan is easing the path for foreign lawyers, and its depreciating yen makes assets more attractive, boosting mergers and acquisitions. The government has also introduced guidelines urging companies to consider takeover offers, increasing M&A activity.

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Challenges in Accessing Finance

German firms are facing challenges in securing loans due to economic uncertainty and hesitancy from banks, impacting business investments and job creation. This is particularly difficult for smaller companies, with larger firms like Volkswagen and BMW opting to increase investments abroad.

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Economic Downturn

Germany's economy is facing a challenging period with a potential recession looming, lagging behind other advanced economies in terms of GDP growth. Structural issues, such as dependence on Chinese trade and energy prices, as well as a decline in exports, are contributing factors. However, there is optimism for a medium-term recovery, with easing energy shortages and investments in green energy.

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EU Investment Surge in China

Despite calls for 'de-risking' economic ties, EU investments in China reached a new quarterly record of US$3.9 billion in Q2 2024, led by German carmakers. This surge is driven by companies' desire to localize production and protect supply chains from geopolitical tensions. However, it also occurs amid rising trade tensions between the EU and China, particularly in the automotive sector.

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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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Economic Stimulus Measures

China has announced fiscal stimulus measures to support its economy, including cutting lending rates, lowering cash reserve requirements, and providing liquidity to the stock market. However, there are concerns that these measures may not be enough to boost consumer confidence and address the property market crisis, with some calling for more direct aid to consumers.

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US Tariffs and Trade

US firms are bracing for potential tariffs as the election approaches, with Republican candidate Donald Trump proposing new tariffs on imports and Chinese goods. These tariffs may lead to higher prices for consumers and impact various industries. The impact of tariffs on inflation and US relations with allies is uncertain.

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Military Technology

Ukraine's military technology and capabilities are evolving, with successful long-range strikes on Russian ammunition depots and the development of advanced drones. This has reduced Russia's artillery advantage and demonstrated Ukraine's growing self-reliance in military technology, which may impact the role of American firms in the future.

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Taxation and Budget

The UK's Labour government's tax-raising budget, including increases to National Insurance and capital gains tax, aims to fill a fiscal gap. However, businesses warn that these measures could hurt hiring, push up inflation, and impact their ability to invest and grow.

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Impact of Geopolitical Conflicts

The ongoing conflicts in the Middle East, particularly between Israel and Iran, have led to rising crude oil prices, affecting various sectors in India. Additionally, the Ukraine-Russia war has severely disrupted global supply chains, impacting the trade of key commodities such as food and energy resources.