The tragedy in Ukraine could lead to a real paradigm shift and the emergence of a new world order. Some of the possible consequences, such as a slowdown in world trade, rearmament and a return to confrontation between the major strategic blocs, are a step backwards. But others, such as the realisation of our dependence on fossil fuels, could give a massive boost to the energy transition.
Like everyone, we are all shocked by this war and the unimaginable images of raw violence against civilian populations. The sight of an authoritarian regime in Europe launching such a cruel war on its neighbour with complete disregard for the international norms carefully crafted for the past 70 years is devastating. The collapse of peace in the middle of Europe and the massive exodus of populations are a reminder of very dark times rather confined to history books than in the middle of our TV feeds and internet browsers.
We do not want to add to the slew of comments made in the press on the conduct of the war. We are not qualified to make strategic forecasts or military analysis. Having said this, as long-term investors, we can see this tragedy as a paradigm shift which should lead to a lasting new world order. We believe that the effects of this crisis will be much deeper than most investors can anticipate at present. These effects will shape the investment environment in the coming years, sometimes in quite surprising ways.
Probably the most obvious and depressing forecast is that we will return to a divided world composed of competing strategic blocs. But more importantly, this war has highlighted the challenge that authoritarian regimes pose against liberal democracies and what constitute the West as an ideological entity. Unless the world quickly returns to the multilateral order crafted during the last 70 years, this struggle is likely to intensify. The current course accelerated by the Russian aggression of Ukraine is for countries to align themselves with one bloc. This will undoubtedly lead to a reversal of globalisation and the free flowing of trade and ideas across the world. We have also seen substantial pledges to rearmament from countries like Germany and China, and this trend is likely to increase greatly as a direct result of this crisis. Historically, this has never been good news: experience tells us that each bloc is likely to compete much more aggressively for influence and resources. Countries within these blocs are likely to want more autonomy and control over their own industrial policies (a trend already started by the Covid pandemic). With the resulting re-shoring of industrial production and the increase in competition for essential resources, we will probably see a decline in global trade, which had been the source of immense increase in overall prosperity in the last 50 years. The world is becoming a much more uncertain place and the investment landscape harder to navigate. Alas, this is just another forecast, but to quote Louis Pasteur, the French microbiologist, “In the fields of observation, chance favours only the prepared mind.”
Still unknown is the position of China in relation to this crisis. There is currently an intense media war with a lot of posturing on both sides. It seems however that China has been caught off-guard by the Russian move and that its leadership is still trying to position itself in this new world order. Torn between its distrust of liberal democracies and its alliance to an unpredictable leader that has clearly mislead them, the Chinese have not yet given clear signals over their policy in relation to Ukraine and the conflict. The US is trying to apply maximum pressure, which may not be the most efficient strategy, but the Chinese government will most likely try to extract more concessions from the US before taking side. Could this be a thawing of Sino-US relations? The coming of a much needed reset in the relationship between the world’s two largest economies would certainly make the world a better place for the coming years.
Some consequences of this war will be positive for the world. The coming together of Western democracies and the strengthening of the European Union will curtail the demagogues who have been pandering to Mr. Poutine and apologists of dictatorships. Who can still claim that Russia is an enviable model? For now, at least, every country in Europe has toed the line and the resolve of NATO has been massively boosted, even in the most unlikely places such as Sweden and Finland. A daring prediction could even be that the new bipartisanship in the US could herald a calmer political landscape. United against the aggression of Ukraine, Republicans and Democrats could find common ground on other subjects and appease the unhealthy level of tension in the political discourse across the Atlantic. This in turn could lead to a more stable foreign policy in the US and the restoration of confidence in the leadership of the West. Although this may prove overoptimistic just ahead of the midterm elections, it is not completely out of reach once the chips have fallen and we start looking at 2024 and the Presidential election. In a country united against Russia, it will be much harder for the demagogues to survive, and sanity may remain in the White House.
But perhaps the most positive lesson from this catastrophe is the graphic realisation of our over-reliance on fossil fuels. With the economic sanctions against Russia and the threat of our oil and gas supplies being cut off came the unavoidable truth that we have not been moving fast enough towards the energy transition. The massive rise in gas prices everywhere has scrambled governments already challenged by inflation to alleviate the pain. However, there can only be temporary measures to soften the immediate blow for consumers. The unavoidable fact is that we have been too slow to adapt and that we need much more resolve to enter the carbon-free world. It is not a surprise that clean energy stocks have been doing well in the current market conditions. We believe that this will be one of the most enduring results of the current situation and that the transition will accelerate massively in the coming years. If there can be one silver lining in this madness, surely this is the best one.
Today missiles are falling over Ukraine but there are rumours of peace talks. The civilized world is pleading for a speedy solution and a return to diplomacy. The alternatives are totally unacceptable and very scary. However, it is worth remembering that once the tanks will have left, the massive damage inflicted by the Russian army on civilian infrastructure will remain a permanent scar on the face of Europe that will be impossible to erase in our lifetime. Our investment considerations seem quite paltry against the massive challenges of healing an entire people. Let’s all pray for better times.