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Mission Grey Daily Brief - July 14, 2024

Summary of the Global Situation for Businesses and Investors

The world is witnessing a period of geopolitical fragmentation, with escalating tensions between major powers, trade disputes, and rising nationalism challenging globalization. The UK Labour Party's landslide victory signals a shift away from the Conservatives, while France faces political uncertainty with a hung parliament. The US and its allies remain silent on Israeli strikes in Gaza, and China's military drills in Belarus send a strong message to NATO. Meanwhile, political instability in Nepal and India's crackdown on NGO funding impact development and social welfare.

Political Instability in Nepal

Nepal's government has collapsed after losing a trust vote, triggering a period of political uncertainty. The country has seen three governments since 2022, and the latest coalition between the Nepali Congress and the Communist Party of Nepal-UML is unlikely to bring stability. This constant political upheaval has hindered Nepal's development, impacted its tourism industry, and led to large-scale outward migration.

China's Military Drills in Belarus

Chinese and Belarusian soldiers are conducting joint military exercises near the Polish border, sending a clear message to NATO. This comes as tensions rise on the Poland-Belarus border, with Poland closing border crossings and planning to fence off its frontier. The drills, named "Eagle Assault 2024," are a show of unity between China and Russia, and a response to Western sanctions and criticism.

US-Israel Relations

US President Biden has blamed Israel for the failure to end the war in Gaza, sparking controversy. He criticized Israel's conservative war cabinet and called for a two-state solution. Meanwhile, Türkiye's President Erdoğan has opposed NATO's cooperation with Israel, stating that it goes against the alliance's core values.

India's Crackdown on NGO Funding

India's cancellation of FCRA licenses for thousands of NGOs has disrupted vital services and exacerbated unemployment. Smaller NGOs have been particularly affected, and the loss of jobs in the sector has had a significant impact. This move by the Modi government has created uncertainty and a chilling effect on civil society, with organizations fearing further crackdowns.

Recommendations for Businesses and Investors

  • Nepal: Businesses and investors should be cautious about operating in Nepal due to the country's political instability. The frequent changes in government and lack of long-term policies, especially in foreign relations, create an unpredictable environment.
  • China-Belarus Drills: The military exercises demonstrate the strengthening alliance between China and Russia, which could have implications for businesses operating in the region. Investors should monitor the situation and assess the potential impact on their interests.
  • US-Israel Relations: The strained US-Israel relations may affect businesses operating in the region, particularly those in the defense and security sectors. Investors should consider the potential impact on their portfolios, especially in light of the ongoing conflict in Gaza.
  • India's NGO Crackdown: Businesses and investors with interests in India should monitor the situation and assess the potential impact on their operations. The loss of NGO funding has disrupted vital services, and the Indian government's crackdown on civil society could create further uncertainty.

Further Reading:

As Nepal government loses trust vote, the country enters another period of political uncertainty - Scroll.in

As polls from UK to France show, fragmented geopolitics still a challenge - South China Morning Post

Biden Blames Israel - The New York Sun

Chinese Communist Soldiers Train in Belarus, the Kremlin’s Satellite in Eastern Europe and a Stone’s Throw From NATO - The New York Sun

Empty beds, lost jobs: the price of India's crackdown on NGO funds - Context

Erdoğan says Türkiye opposes NATO cooperation with Israel - Hurriyet Daily News

How Hong Kong really threatens America’s security and economy - South China Morning Post

Themes around the World:

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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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US-Russia Relations

The US has added numerous entities to its trade blacklist for allegedly aiding Russia's war effort in Ukraine, restricting their access to US items and technologies. This action is part of the US's vigilance in defending national security and sending a message to malicious actors.

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Energy Security

India is hungry for energy to meet the demands of its growing population and economy. The country aims to quadruple its natural gas use by 2030, which has raised concerns given the volatility of the gas market. India is also investing in nuclear power, green hydrogen, and electric vehicles for energy independence.

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Hurricane Helene's Impact

Hurricane Helene caused extensive damage to Georgia, becoming the most destructive hurricane in the state's history. The storm impacted power grids, roads, water systems, and homes, resulting in a long reconstruction process and significant financial costs, with preliminary estimates of the economic impact on agriculture and timber reaching $6.46 billion.

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UK's Regulatory Technology Sector

The UK's regulatory technology (RegTech) sector is expected to grow significantly, driven by technological advancements and increasing regulatory pressures. Organisations are seeking innovative RegTech solutions for compliance and risk management, particularly in the financial sector. The UK RegTech market is projected to reach $19.5 billion by 2026, with a focus on integrating AI, machine learning, and blockchain technologies.

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Cyber Security Threats

The UK faces escalating cyber threats, particularly from state-sponsored actors in Russia and China, targeting critical national infrastructure and digital supply chains. The new government has committed to introducing a Cyber Security and Resilience Bill, equivalent to the EU's NIS2, to bolster defenses against these attacks.

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US-China Trade War

The US and China are in a trade war, with the US imposing tariffs on Chinese goods and China retaliating. This has disrupted supply chains and increased costs for US businesses, potentially reducing US economic growth.

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Global Manufacturing Decline

The global manufacturing industry is weakening, with declining activity in major regions like the US, Eurozone, and China. This is indicated by falling purchasing managers' indices (PMIs), especially in Germany. However, some regions like the UK, India, and Southeast Asia show growing manufacturing activity.

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Economic Stimulus Measures

China has announced fiscal stimulus measures to address its economic slowdown, including monetary easing, government spending, and investment incentives. However, there are doubts about their effectiveness, with some analysts predicting a potential global recession if stronger action isn't taken.

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US-China Trade Tensions

The US has blacklisted 1,000 Chinese companies and imposed high tariffs on Chinese goods, citing national security concerns. This has disrupted bilateral business and rerouted supply chains, with potential negative consequences for the US economy. China has responded with efforts to reduce reliance on US technology and develop its battery industry, threatening US competitiveness.

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Economic Impact of War

Israel's war against Hamas and Hezbollah militant groups has resulted in high financial costs, with military spending increasing significantly. This has led to concerns about declining investment, higher taxes, and a strain on government budgets. The conflict has also disrupted the tourism industry and hindered economic growth, particularly in border areas.

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Market Volatility

Thailand's SET Index experienced slight fluctuations amid market volatility, influenced by factors such as selloffs and earnings reports. Foreign investors play a significant role in the Thai stock market, impacting liquidity, market sentiment, exchange rates, and sector-specific performance.

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US-China Drone Supply Chain Disruptions

China's sanctions on US drone manufacturers, such as Skydio, have disrupted the US drone supply chain in Ukraine. This has prompted Skydio to seek alternative suppliers and raised concerns about potential disruptions in US supply chains. China's sanctions are a strategic move to increase global reliance on Chinese suppliers and eliminate leading American drone companies.

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Political Uncertainty

Japan's recent parliamentary elections resulted in Prime Minister Shigeru Ishiba's ruling coalition losing its majority, creating political uncertainty. This could impact the Bank of Japan's monetary policies and the country's market rally, which has experienced one of its strongest rallies in decades, with the Nikkei 225 index up nearly 50% since 2023.

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US-China Trade Tensions

The US and China are engaged in a trade war, with both countries imposing tariffs and sanctions on each other's companies. This has disrupted supply chains and impacted businesses, causing them to reassess their exposure to China. The US has also restricted investment in Chinese tech firms, particularly in advanced technologies such as AI and quantum computing.

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Thailand's Investment Opportunities

Thailand has seen a record investment influx of $21.6 billion in the first nine months of 2024, a 42% increase from the previous year. The Thailand Board of Investment (BOI) attributes this to the country's strategic location, robust digital infrastructure, clean energy resources, and strong government support. Foreign Direct Investment (FDI) has expanded, with the top 5 countries being Singapore, China, Hong Kong, Taiwan, and Japan.

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Russian Hacking Campaign

Russia's hacking campaign against Georgia's government, companies, and infrastructure aims to thwart its westward path and pro-Western aspirations. This includes infiltrating key ministries, the energy sector, and telecommunications networks, with potential sabotage and intervention in domestic politics.

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Political Uncertainty

Japan's recent parliamentary elections resulted in Prime Minister Shigeru Ishiba's ruling coalition losing its majority, creating political uncertainty. This could impact the country's market rally and business environment, which had been attracting significant investment over the past two years.

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Automotive Industry Crisis

German carmakers like Volkswagen, BMW, and Mercedes-Benz are facing difficulties due to declining sales, rising costs, and competition from Chinese manufacturers. They are also caught between production decisions in the US and Mexico, with potential supply chain shocks from Trump's trade policies.

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Energy Transition

Germany's transition to green energy is attracting investments and has the potential to future-proof energy-intensive industries. However, the shift away from nuclear power and the phase-out of cheap Russian energy sources have created challenges, with energy prices remaining a factor of uncertainty.

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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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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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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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Economic Growth Forecast Slashed

The International Monetary Fund (IMF) slashed Japan's 2024 economic growth forecast to 0.3%, the lowest since the pandemic, citing negative developments such as auto supply disruptions and the fading of one-off factors like tourism.

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US-China Competition

The US and China are engaged in a multidimensional competition, with economic growth, military aspects, and supply chain disruptions as key dimensions. China's lead in battery technology and production, and its super deduction for R&D impact the US's ability to compete.

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Economic Slowdown

France's economy is facing challenges with a projected public debt of over €3 trillion and a widening deficit. Austerity measures and budget cuts have been proposed, but there are doubts about the government's ability to implement effective measures. This instability could slow down EU-wide growth.

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Foreign Investment and M&A Activity

Despite the ongoing war, Ukraine is witnessing growing foreign investment and mergers and acquisitions (M&As). In the first nine months of 2024, there were 36 M&As worth $643 million, compared to 28 deals worth $494 million in 2022. Foreign investors are seeking opportunities in sectors like agri-tech and telecoms, with companies from North America, Europe, and the Middle East leading the way.

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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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Automotive Sector Challenges

The automotive sector in France is facing challenges due to a wave of plant closures and a sharp drop in sales of electric vehicles, partly attributed to competition from China. This has resulted in job losses and given rise to debates about the pace of electrifying the car fleet and the impact of European regulations. There are concerns about the accessibility and affordability of electric vehicles for the working and middle classes, as well as their ability to meet emission reduction targets.

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UK's RegTech Sector

The UK's RegTech industry is expected to grow substantially, driven by technological advancements and increasing regulatory pressures. The demand for RegTech solutions is rising as organizations seek to enhance compliance and risk management capabilities, particularly in the financial sector.

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US-China Trade Relations

The US and China are engaged in a trade war with significant tariffs on Chinese goods, impacting supply chains and business operations. The US aims to protect national security and reduce dependence on China, while China prioritizes technological self-reliance. This decoupling of economies may lead to global fragmentation or US isolation.

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India-Canada Relations

The recent breakdown in diplomatic relations between India and Canada over accusations of Indian government agents' involvement in a murder in Canada has raised concerns about the impact on bilateral trade and immigration ties. While no economic retaliation has been imposed yet, the uncertainty has led to cautious business expansion and potential delays in immigration processing.

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Use of Private Security Contractors

Israel is considering using private security contractors, possibly including UK special forces veterans, to deliver aid to Gaza. This decision is controversial as aid agencies fear being targeted as combatants if they are part of militarized convoys. The use of private security firms has been proposed by Israeli-American businessman Mordechai Kahana's firm, Global Delivery Company (GDC), which has experience in war zones.

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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, contribute to the downturn.

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Energy Security

Ukraine is facing energy security issues due to Russian attacks on its power plants and infrastructure. The loss of nuclear power and electricity generation capacity could lead to blackouts and a humanitarian crisis during the upcoming winter. The EU and the US are providing financial support, backup equipment, and humanitarian aid to bolster Ukraine's energy sector.

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US Tariffs and Trade Policies

US firms are bracing for potential tariffs as the presidential election approaches. Republican candidate Donald Trump has proposed a universal import tariff, including a 10% tariff on all imports and up to 60% on Chinese goods. These tariffs are expected to increase prices for consumers and impact various industries. The US's trade policies and relations with China, including export controls on semiconductors, are also shaping global dynamics.