From US negotiations with North Korea to the trade rift with China, 2018 has been an eventful year in geopolitics, with significant implications for foreign policy and financial markets. In a UBS On-Air interview recorded May 23, former Senate Majority Leader George Mitchell and UBS Chief Investment Officer Americas Mike Ryan provided their perspectives on recent geopolitical developments and the implications for investors.
North Korea summit
On President Trump's on-again, off-again summit with North Korean leader Kim Jong Un, Senator Mitchell said Pyongyang has already strengthened its hand by getting a US president to agree to a meeting. "Every North Korean leader has wanted to meet with the American president," said Mitchell, a member of the UBS Americas Advisory Council. "We are the dominant power, and a meeting with the American president bestows credibility and strength on any leader in his or her own country."
If negotiations do proceed and diplomatic progress is made, financial markets would likely react positively, Ryan said. "I also think [it] would be perhaps a signal that the US and China can also reach broader agreement on other issues, which could perhaps extend to trade."
US-China trade tensions
Looking more closely at the US-China trade tensions, Ryan puts the odds of a major clash with significant economic costs at 20%-30%. He believes that, despite the heated rhetoric of late, the US and China will ultimately find a way to negotiate, "simply because it's not in anyone's interest to see a trade war."
"One of the big issues here is that trade has become far more complex," Ryan said. "It used to be simply that you'd retaliate against one country and perhaps it impacted employment only in that country. But the way the global logistics chain works today, there's the interrelation between trade. The way components fit into many different parts of a finished good means that you could unintendedly have an impact on your own economy while you're trying to wage a trade war against someone else."
Oil-related sanctions on Iran
Asked about President Trump's decision to withdraw from the Iran nuclear agreement and re-impose oil-related sanctions, Senator Mitchell said the president is further alienating European allies by not compromising with a plan to modify the 2015 accord.
The likely result of Trump's unilateral move in early May "will be our sanctioning not so much Iran, but the companies in Britain, France, Germany and other of our allies who are anxious to keep the agreement in force and keep it going," Mitchell said. "That will be very awkward at a time when our relations with Europe are already strained over trade disagreements."
The decision also likely puts continued upward pressure on energy prices, Ryan said. While rising oil prices could dampen growth for some oil-dependent economies, the US has become less vulnerable to higher prices.
"Remember, the US has gone from being the marginal consumer of energy to, now, the marginal producer of energy," Ryan said. "So, when energy prices go up, where it used to be a significant tax on consumption and it was a drag on the US economy, that's no longer true. In fact, if you look at the net effect on the US economy, it's more balanced now than it's ever been. "
Is your portfolio prepared for new global challenges and opportunities? Together we can find an answer. Connect with your UBS Financial Advisor or find one.