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Mission Grey Daily Brief - July 22, 2024

Summary of the Global Situation for Businesses and Investors:

Global markets are experiencing heightened volatility as the US-China trade war escalates, with both sides imposing tariffs and restrictions. Tensions in the South China Sea are rising, with a US Navy vessel conducting a freedom of navigation operation near Chinese-occupied features. Europe is facing an energy crisis as Russia reduces gas supplies, causing prices to soar and raising concerns about winter shortages. Meanwhile, the UK is in a political crisis as the government collapses, triggering a general election with far-reaching implications for the country's future, including its relationship with the EU and the world. Businesses and investors are navigating a complex and uncertain geopolitical landscape, with significant risks and opportunities emerging.

US-China Trade War Escalates:

The US and China's trade war has entered a new phase, with both countries imposing additional tariffs and restrictions on each other's goods and services. The US has accused China of unfair trade practices and intellectual property theft, while China denies the allegations and retaliates with its own measures. This escalation has disrupted global supply chains and impacted businesses reliant on trade between the world's two largest economies. Companies with exposure to US and Chinese markets should diversify their supply chains and consider alternative markets to minimize the impact of tariffs and potential further restrictions.

Tensions Rise in the South China Sea:

Military tensions are rising in the South China Sea as the US challenges China's expansive maritime claims. The US Navy has conducted freedom of navigation operations near Chinese-occupied features, asserting the right of innocent passage. China has responded with aggressive rhetoric and military posturing, highlighting the risk of miscalculation and conflict. Businesses should prepare for potential disruptions to shipping lanes and energy supplies in the region, especially if tensions escalate further. Resiliency planning and supply chain diversification are key to mitigating these risks.

Europe's Energy Crisis:

Russia's reduction in gas supplies to Europe has triggered an energy crisis, with wholesale gas prices soaring and energy-intensive industries facing significant challenges. This development underscores Europe's vulnerability to energy supply manipulation by Russia, which wields energy as a geopolitical weapon. Businesses should advocate for a coordinated European response to diversify energy sources and suppliers, accelerate the transition to renewable energy, and ensure adequate storage capacity to mitigate the impact of future supply disruptions.

Political Upheaval in the UK:

The UK is in a state of political flux as the government has collapsed, triggering a general election. This election will have far-reaching implications for the country's future, including its relationship with the EU and its global trade relationships. Businesses should prepare for potential policy shifts and market volatility. The outcome will shape the UK's economic trajectory and its attractiveness as an investment destination. A key risk for businesses is the potential for a more protectionist and inward-looking UK, which could impact trade and supply chains.

Recommendations for Businesses and Investors:

Risks:

  • US-China Trade War: Diversify supply chains and explore alternative markets to minimize tariff impacts.
  • South China Sea Tensions: Prepare for potential shipping lane and energy supply disruptions; review contingency plans.
  • Europe's Energy Crisis: Advocate for a coordinated European response to reduce vulnerability to Russian energy manipulation.
  • UK Political Upheaval: Anticipate policy shifts and market volatility; a more protectionist UK could impact trade and supply chains.

Opportunities:

  • Supply Chain Diversification: Explore opportunities in Southeast Asia, Latin America, and Africa to reduce reliance on US and Chinese markets.
  • Renewable Energy Transition: Invest in renewable energy projects and technologies to help Europe (and other regions) reduce their dependence on Russian gas.
  • UK Market Volatility: Identify potential M&A opportunities arising from the political upheaval and assess the impact of a changing regulatory environment.
  • Resiliency and Planning: Enhance business resiliency by developing contingency plans and stress-testing supply chains to identify vulnerabilities and mitigate risks.

Further Reading:

Themes around the World:

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High-Speed Rail Competition

France has opened its high-speed train market to competition, with domestic and international operators offering alternatives to the national carrier SNCF. This will improve accessibility and comfort for passengers, but there are concerns about the impact on scheduling and pricing.

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Healthcare Reforms and EU Alignment

Ukraine's healthcare system is under immense strain due to frequent attacks on its infrastructure. However, the country remains committed to healthcare reforms and is using the crisis as an opportunity to align its health sector with EU rules in preparation for future EU accession talks. This includes harmonizing policies and regulations in areas such as drug manufacturing, water quality, and patient movement.

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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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Scams and Fraud

Scams are a significant issue in Thailand, with over 89% of respondents in a survey reporting exposure to scams monthly. Online scams have resulted in substantial financial losses, impacting individuals and the country's economy. Efforts to combat scams include collaborations between private and public sectors, as well as the development of anti-scam technologies and early warning systems.

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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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India-Russia Relations

India has become a key supplier of restricted critical technologies to Russia, presenting a challenge to US and EU efforts to curb exports fueling Russia's military capabilities. India's role as a transshipment point and a top buyer of Russian oil has made it a focus for Western sanctions agencies, with several Indian firms already facing sanctions.

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Israel's Iron Beam Laser Defense System

Israel plans to use lasers to shoot down incoming missiles with its 'Iron Beam' system, bringing a new era of warfare to its conflicts with Iran and its partners. The system is expected to be operational within a year and will be more effective and cheaper than traditional interception missiles.

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Humanitarian Crisis in Gaza

The ongoing conflict has resulted in a dire humanitarian crisis in Gaza, with reports of food, water, and medical supply shortages, as well as overcrowding and the risk of lethal contagion. The situation has been further exacerbated by Israeli restrictions on humanitarian movements and the potential banning of the UN relief agency, Unrwa, from operating in Israel.

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Cybersecurity Threats

The UK faces increased cyberattacks from state-sponsored threat actors, particularly Russia and China, targeting critical national infrastructure and digital supply chains. The new Cyber Security and Resilience Bill aims to address these threats, in line with the UK's commitment to NATO's digital security.

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International Arms Trade with Israel

A German ship carrying explosives intended for Israel docked in Egypt after being rejected by several countries, amid human rights concerns. Meanwhile, Barclays sold its shares in Israel's largest weapons company, Elbit Systems, due to pro-Palestinian pressure.

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Hydrogen Energy Transition

Thailand is exploring hydrogen co-firing technology with Mitsubishi Power to transition to clean fuels. While this project aims to support Thailand's goal of carbon neutrality by 2050, there are concerns about the safety and environmental impact of storing hydrogen underground near the ocean. The financial and ecological risks are significant, and Thailand may suffer serious repercussions if the project fails.

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Economic Impact on Israel

The conflict with Iran and tensions with Palestine have economic implications for Israel. The potential disruption of oil supplies and volatility in oil prices affect Israel's economy, which is closely linked to the global energy market. Additionally, the controversy surrounding Israel's actions has led to divestment and economic pressure on companies associated with its military and defence industry.

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US Manufacturing Decline

The US manufacturing industry is in decline, with the US PMI falling below 50, indicating accelerated activity decline. This is due to reduced spending, investment, and inventory-building amid election uncertainty, though lower interest rates have boosted confidence.

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Thailand's Energy Transition

Thailand is exploring hydrogen underground injection with Mitsubishi Power to contribute to a greener environment and enhance technology. This supports Thailand's goal of carbon neutrality by 2050 and net-zero emissions by 2065. However, underground hydrogen storage presents risks, including the possibility of explosions due to hydrogen's flammability. The project also requires costly infrastructure, and Thailand may face serious economic repercussions if it fails.

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Cannabis Market Opportunities

Germany's cannabis market is experiencing rapid growth following regulatory changes and the decriminalization of cannabis sales. The patient base has grown significantly, and companies like Sanity Group are projecting substantial revenue increases. However, there are supply chain challenges in meeting the increasing demand, and uncertainty remains due to the evolving regulatory landscape.

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UK's Relationship with Russia

The UK has escalated its sanctions against Russia's covert seaborne oil exports, targeting a 'shadow fleet' of oil tankers. This has been done in coordination with other countries to curtail Russia's ability to bypass sanctions and sustain its war efforts. The UK has also sanctioned LNG vessels and Russia's energy sector, putting pressure on Russia's energy industry and revenue streams.

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Israel's International Relations

Israel's relations with other countries are influenced by its conflict with Iran and its treatment of Palestinians. US and European officials have urged restraint and warned of regional destabilization. Israel's military actions have also drawn mixed responses, with the US encouraging a targeted approach while the UK and others express concern. Israel's potential severing of the West Bank from the global financial system could strain ties with Western partners.

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Iranian Oil Facility Attacks

Markets are panicked by the possibility of Israel attacking Iranian oil facilities in retaliation for Iran's ballistic missile strikes. While the likelihood of such an attack is low due to logistical challenges and potential damage to foreign relations, Israel's aggressive messaging has put it in a strategically advantageous position.

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Economic Contraction

Germany's economy is expected to shrink by 0.2% in 2024, marking the second consecutive year of contraction. This is due to a combination of conservative public investment, over-reliance on manufacturing and exports, external shocks like the Russia-Ukraine conflict, and structural challenges such as aging infrastructure and population, and excess red tape.

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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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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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Structural and Cyclical Challenges

Germany's economic woes are attributed to a mix of structural and cyclical issues, including a slow transition to new industries like AI and renewable energy, bureaucratic inefficiencies, insufficient infrastructure investment, and a decline in the working population.

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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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Foreign Investment Surge

Thailand's investment applications surged by 42% in the first nine months of 2024, reaching a 10-year high of $21.7 billion. This reflects growing confidence in the Thai government's policies and improved business regulations. Foreign investment rose 38%, with major contributions from Singapore and China. Big Tech companies like Nvidia, Amazon, Google, and Microsoft are investing heavily.

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Political Instability

France's political landscape is precarious, with President Macron's gamble on new elections leaving Prime Minister Barnier's government without a majority in parliament. The leftist NFP alliance and the far-right National Rally could join forces to bring down the government, causing potential rudderlessness until at least July 2025.

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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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Foreign Investment Opportunities

Japan is attracting foreign investment, with a depreciated yen and government initiatives making Japanese assets more attractive. The country is also easing restrictions for foreign lawyers, creating more opportunities for international law firms, especially in cross-border deals.

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Shipping Resilience

Despite intensified Russian attacks on Ukrainian ports and ships, Maersk has resumed regular service to Ukraine, demonstrating resilience in the country's seaborne trade. German shipping giant Hapag-Lloyd has also confirmed continued operations.

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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 is expected to improve service, accessibility, and affordability for passengers, but there are concerns about the impact on scheduling and pricing transparency.

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China's Africa Strategy

China's Belt and Road Initiative focuses on infrastructure and resource extraction in Africa. Political instability in Africa poses challenges to China's investments and may force a shift from its non-interference policy. China's involvement in Africa has enabled a geopolitical shift towards it but has not contributed to self-determined African development.

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India's Growing Economy

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 consumption and premiumization, with a focus on domestic manufacturing. India's stock market has also been strong, with the Nifty 50 rallying 25% in the last 12 months. However, there are concerns about oversupply and weak economic growth impacting companies' Internal Cash Return on Invested Capital (I-CRoIC).

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Leadership Transition in Family Businesses

Germany's renowned Mittelstand, comprising mostly family-owned businesses, faces challenges in leadership transition. As patriarchs retire, many struggle to find heirs interested in continuing the business, leading to ownership succession issues. This is further exacerbated by high corporate tax rates, rising energy costs, and bureaucratic complexities.

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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 is expected to improve accessibility, comfort, and pricing for passengers. New operators, such as Le Train and Proxima, are investing in the market, while international companies like Trenitalia and Renfe have expanded their routes. However, there are concerns about the potential impact on scheduling options and the viability of less profitable lines.

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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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Battery Technology Race

The US battery industry has fallen behind global leaders, particularly China, which dominates the lithium-ion battery market. US companies are working towards commercializing next-generation solid-state batteries but have focused funding on current-generation technology. To catch up, the US must urgently commercialize new technologies, increase R&D funding, and incentivize production of advanced batteries.

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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.