Richard Bullock

Ongoing inflation volatility is likely for some time as the war in the Ukraine drags on and the world continues to decouple into rival camps, according to Richard Bullock, senior geopolitical strategist at Newton Investment Management.

And tensions with China will “likely remain strained but perhaps with more potential for dialogue” under the Albanese government, with implications for Australian commodities, international defence establishments, and the global semiconductor industry, Bullock said.

Speaking with Julia Newbould, managing editor at Conexus Financial, as part of Conexus Financial’s Market Narratives podcast series, Bullock said few expected the war in Ukraine to drag on for as long as it has. Support from Europe and the US in the form of weapons, as well as expanding war aims as Russia sets its sights on the full southern belt of Ukraine, is likely to prolong the war.

This will promote retaliation from Russia in the form of their gas policy towards Europe, and suggests ongoing inflation volatility, Bullock said. It remains to be seen how quickly central banks can get this under control.

“So what that means for markets, what it means for economies, I think is clearly more volatility in commodity prices, more disruption in energy supply, which will impact Europe primarily,” Bullock said.

Inflation in soft commodities like agriculture and food will have more of an impact on the developing world given the portion of their consumption basket that is comprised of food, Bullock said, pointing to countries in Africa and the Middle East.

Rival camps

The world is decoupling into rival camps involving autocratic versus democratic countries, with democratic countries being “a lot more cohesive and cooperating more in terms of security, energy policy and sanctions,” Bullock said.

Autocratic countries such as China, Saudi Arabia and Iran among others are also taking notice of how Russia has been targeted with sanctions and its financial system being cut off from the global financial system.

These countries are still keen to trade with Russia and cohesion among the camps is likely to grow, Bullock said, although probably not to a level of polarisation seen during the original Cold War.

“They’ll drift apart, and you’ll see more confidence building amongst the respective members of the democratic camp and the autocratic camp, which means that they’re more prepared to trade with each other, invest in each other’s economies, and really accept each others’ currencies in their own exchange reserves, for example,” Bullock said.

On the issue of China and Taiwan, events in Ukraine are likely to discourage China in the near term due to the Western response being strong and unified, and Beijing seeing the high economic toll that decoupling from the West would take.

“And this happens at a time that China is obviously facing very, very severe domestic economic challenges with its real estate sector and with its Covid-19 Zero policy which has curtailed a lot of activity in China,” Bullock said. “So I don’t believe that China is going to be looking at Ukraine and deciding to make an imminent move to try and seize Taiwan.”

With the Australia-China relationship experiencing obvious tensions, the new Albanese government will attempt to soften tensions without conceding on core principles and values. The relationship will “likely remain strained but perhaps with more potential for dialogue,” he said.

Diplomatic offensive

China’s “diplomatic offensive” with south Pacific island nations and its security agreement with the Solomon Islands are significant because they are strategically located and would potentially give the Chinese navy the ability to refuel and make stoppages.

This is clearly in response to Beijing’s sense that Australia and the US are doing more with their own military alliances and co-operations, with China looking to push out beyond the first island chain to try and have more of a strategic positioning.

“When you look on a map where the Solomon Islands is and…also the other South Pacific Islands, they’re very strategically located to Australia’s north-east, and also form a potential barrier up past the eastern side of Indonesia and Papua New Guinea,” Bullock said.

On the commercial and trade side, iron ore accounts for about 25 per cent of Australia’s total exports and Beijing wishes to reduce its iron ore dependency on Australia over the medium term.

It is working on a large iron ore development in Guinea in West Africa, and also setting up a new entity called the China Mineral Resources Group, intended to be a cooperative buyer for China’s steel industry to negotiate as one entity.

“This is something that should be monitored as well because it potentially over time might give China more power around lower prices, and it’ll be interesting to see how the big iron ore producers respond to this if they feel that they’re being bullied into supplying iron ore at a price that’s unfavourable or non-market related,” Bullock said.

Some industries will be clear beneficiaries, despite increasing geopolitical tension, Bullock said. With the US Senate passing the CHIPS and Science Act Act of 2022, over US$50 billion of domestic funding and subsidies will be made available for semiconductor companies prepared to invest in the United States.

The US and European defence establishments will also benefit enormously from ramped-up defence spending, and Australia, too, is increasing its defence spending.

In emerging markets, there may be the beginnings of a debt default wave on the back of the Covid-19 pandemic and ensuing high inflation,” Bullock said.

“It started with Sri Lanka recently as the kind of poster child, but there’s a lot of other countries that are high risk,” Bullock said. “So that’s something to keep an eye on because if some of these countries start to default or even worse still, become failed states, that will obviously have big implications for regional geopolitics.”

Listen to Richard Bullock discuss the impact of ongoing inflation volatility on global markets on podcast.

Important information

Richard Bullock is an employee of BNY Mellon Investment Management Singapore and provides support to Newton Investment Management as a geopolitical strategist.

Please note, this podcast was recorded before US Speaker of the House of Representatives, Nancy Pelosi visited Taiwan in August.


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