Geo Political Standpoint September 2013

Transcription

1 Geo Political Standpoint September 2013 Market In-Brief: An independent overview & analysis of the international geo-political scene (GPS) By John Longhurst Executive Chairman Tangent Link Limited

2 Introduction In this, our inaugural Market In-Brief thought piece, we are initiating an adjacency to our core competence. Our clients, and our served markets, are all exposed to the deeply complex web of events and actors on the global geo-political stage. We hope we can add value to our clients insight and decision-making process with this new monthly review of the most germane elements of the geo-political scene, harnessing our deep network of global contacts. Rather than reportage, we will endeavour to bring a view of what comes next. Please let us know if this is helpful, or if we can amend it to make it more useful to you, or follow-up with deeper analysis. We will also initiate a similar Market In-Brief on key military system developments. Sincerely, John Longhurst Executive Chairman Tangent Link

3 GPS Key issues 1) US/global Defence Budget Looking first at the US, the impact of Sequestration has been widespread, affecting shorter-term contracts in particular. In the face of this, US Defence companies have been reporting record profit margins, aided largely by programme adjustments provision release from older production contracts signed largely during the Bush Administration. We see profit margins for US contractors coming under pressure during 2014, in the absence of a rapid increase of high margin export orders. At its height during the Bush Administration, the US Defence Budget accounted for somewhat more than half the total global outlay. We believe that the US share of global spend is now in secular decline, and that Asia/Africa/LATAM will become the dominant markets over the coming 20 years. Excepting China (and perhaps Japan in the short term), we have in effect a gradual shift South of global defence spending. European spend will remain a backwater in the global context. We estimate that by 2025, the US will represent 20-25% of the World s defence outlay, but that total global outlay will be 20-25% higher than today in real terms. We expect Chinese defence outlay, in PPP terms, to exceed the US by Emerging Market nations, hitherto the largest importers of Western equipment and services, have become more adept at shifting from mere offset, to genuine technology transfer, and this trend is resulting in more globally competent EM defence equipment suppliers. Thus, for US and European suppliers, the outlook has never been more challenging. The real coming game-changer, in our view, is the growing influence of Chinese exports, and this will at a minimum serve to lower prices paid globally, just as we saw in telecom and energy equipment when globally competent Chinese players entered the scene.

4 2) Mid-East/West Asia tensions Since the Yom-Kippur War of 1973 and the emergence of Oil as the prime global commodity, global financial markets have remained highly sensitive to the region. Even last week, as reports emerged that the US/UK may consider air strikes in Syria, global financial markets fell, despite Syria having no energy exports of its own. Syria has become a proxy-war for innumerable factions. Our view is that unless Iran launched a direct attack on Saudi/Qatar, the implications for energy prices are limited in the medium term, even if Syria joins the list of failed states the caveat to this being if Iraq destabilises and enters its own civil war then we are looking at a VERY different picture. On the 12-month horizon, we see the on-going instability in Egypt and Iran s nuclear programme as higher risks, as well as the continued instability in Libya, a key energy exporter. Bahrain too, remains on the front-burner. All-in-all, elevated global energy prices remain likely, even in the face of the US/global shale revolution, thus funding continued high levels of security spending in the region. A game-changer in our view would be the announcement by Iran that a certain level of nuclear capability had been achieved that crossed a line that Israel/US wouldn t accept. This is by no means new news, but countries throughout the region will continue to make preparations for a nuclear Iran, both in missile defence, and nuclear capabilities of their own.

5 3) China/Japan We may be wrong on this, but we believe that both countries have huge domestic challenges to deal with at present, linked to economic growth. The last thing either nation needs is a military confrontation, as it would bring in the US, and would damage trade for all nations. We do expect a certain level of needling to feed the domestic audience, but we believe that in the 2013/14 timeframe, military action that would trigger a wider impact is unlikely. 4) Cyber The Snowden affair has come at a challenging time for the US, as it has invested much political capital over the past year in outing those it believes have been stealing US intellectual/military IP via cyber-theft. But, as practitioners of Statecraft know, most nations monitor their citizens to the extent they need to/feel they can get away with. Moreover, IP theft via cyber is now a global trade. The US and The West simply have more IP at present to steal. In due course, China will see similar IP outflows once it reaches scientific equivalency with US/Europe/Japan. Whereas 2-3 years ago, cyber was rarely mentioned publicly, we now have massive global initiatives to protect corporate/military IP. We believe in due course, that just as with asbestos, companies that cannot demonstrate clear cyberprotection and theft reporting policies, will be sued by shareholders. In essence, corporate and personal behaviour is changing as the damage of cyber-theft to the economic well-being of nations has become better understood. We believe investment in attribution, alternative internets and counter-strike will increase dramatically in the coming period.

6 Biography John Longhurst John spent 28 years as an investment analyst and fund manager, with a focus on global interactive media, industrial, and defence/aerospace industries, as well as broader cyber and geopolitical areas. Starting with James Capel in 1986, John attained No. 1 rankings in competitive polls from 1988 until 1996, when he joined Capital Group Companies of Los Angeles, one of the world's leading fund management companies, managing more than $1tn of client assets. After becoming a senior Shareholder there, he moved to PIMCO in 2011, as Head of Emerging Markets equity research. PIMCO is one the world's top-5 global fund managers by assets, managing more than $2tn of client assets. John was recently voted by Defence News as one of the 100 most influential people in the US Defence Establishment and has been actively involved in start-up companies over the past decade.