War In 2024
Investors have, overall, learned to live with the Russia/Ukraine war and the current crisis in the Middle East, as well as China/Taiwan tensions. However, they still need to beware of less high profile war risk around the world, consistent with the turbulent times in which we live.
“The number of state-based conflicts, at over 50, is near its highest level since 1946, according to the Peace Research Institute Oslo.”
The Economist, 22 January 2024
I have read several forecasts for this year which have extrapolated from the start of the Russia/Ukraine war in 2022 and the Israel/Hamas conflict in 2023 to award a non-negligible probability to another major war breaking out in 2024, e.g. and notably a Chinese invasion of Taiwan. Not only does this overstate this particular probability (see, e.g. this January 2024 survey by the Center for Strategic & International Studies), it also distracts from tensions in the South China Sea, along the disputed China/India border and, most recently, on the Korean peninsula, as well as obscuring the growing number of smaller scale, but still worrisome, violent conflicts.
This wider pattern is exactly what history tells us we should expect at the end of a hegemony, i.e. what The Economist described as “chaotic global circumstances”. As the article went on to argue, although the Biden Administration has reversed some of the damage done to US influence and alliances by its predecessor, if Donald Trump is back in the Oval Office this time next year, this will prove short-lived. Furthermore:
“…as the clock ticks down on a tight election the effectiveness of the Biden doctrine may [already] be in decline”.
In short, investors should not allow ongoing or potential major wars to blind them to less significant but still potentially portfolio-damaging ongoing and new flare-ups through 2024 and beyond.
These wars are not a repeat of the sort of proxy wars we saw between the US and the Soviet Union during the Cold War — even though China and the US may find themselves backing opposite sides ex post (as is the case in the Israel/Hamas war). Rather, they are locally based and rooted in long-standing grievances of one sort or another, as we are seeing with the civil war in Sudan and the threat of war between Guyana and Venezuela.
The complicated dynamics of the Middle East include several such cases capable of blind-siding analysts and investors alike, as this article by the BBC’s Raffi Berg explaining multiplying missile and air strikes makes clear. For example, although Turkish strikes on Kurdish militia in Iraq and Syria should have come as no surprise, who — other than a handful of real experts — expected Jordan to launch strikes against Iran-backed militia in Syria? Or, for that matter, for Iran and Pakistan to exchange tit-for-tat missile strikes against Baloch separatists, causing the BBC’s Lyse Doucet to write (in a 20 January article):
“This past week has been a reminder, if one was needed, of the unpredictability and peril in this moment of a widening and worsening Israel-Gaza war”?
This is not to argue that concerns about a possible Iran/US clash are not justified — and especially not after the US suffered its second fatalities of the conflict on 28 January. The nonsense being peddled by Washington to the effect that Tehran is “the prime instigator” behind Houthi attacks on shipping in the Red Sea, and that these have nothing to do with Gaza, helps create an atmosphere increasingly ripe for a mis-step of some sort, especially if policymakers in DC believe these claims. The reality is that, although Tehran certainly supplies weapons to the fiercely independent, bellicose and deeply antisemitic Houthi, its influence over them is very limited. As my expert colleagues at ‘Arab Digest’ wrote in a 14 January newsletter:
“[The Houthi’s] is a very clear message to Western powers: use your clout and influence to force the Israelis into a ceasefire, otherwise we will not stop our attacks on Red Sea shipping”.
Where the Houthi are making their mistake is in overestimating Washington’s influence over Israel which, short of actions which would likely doom completely Joe Biden’s chances of re-election, is severely limited (as would still be so if Donald Trump were in the White House).
The same can be said for the ICJ’s interim ruling on the genocide case brought against Israel by South Africa. Indeed, despite some international progress towards a temporary ceasefire, forces within Israel itself have the best chance of bringing about a respite of some sort as pressure to put securing the release of hostages over and above ‘destroying’ Hamas mounts, including within the war cabinet. However, Israeli Prime Minister Binyamin Netanyahu yet to show any preparedness whatsoever to go down this track even though he approved January’s strategic shift to a more targeted campaign, leading to a reduction in the still high number of civilian deaths.
How long this lasts remains to be seen for it is very uncertain that Israeli forces would be able to clear Hamas out of its southern and central strongholds, especially in densely populated Khan Younis and Deir al Balah, without civilian casualty numbers spiralling upwards again. Yet, failure to root out Hamas completely would amount to a “strategic failure” for Israel, as The Wall Street Journal argued on 16 January. Acknowledging that many believe that Mr Netanyahu is being driven primarily by personal interest, accepting such failure would be hard to countenance in any circumstances, suggesting that there is still some considerable way to go before some semblance of peace breaks out, even temporarily.
If it is true that there is no end in sight to the Israel/Hamas conflict, it is even more so in the case of the Russia/Ukraine war. As Chatham House’s Nikolai Petrov reflected in a 24 January note:
“In Russia in 2024…we will likely see fewer attempts to achieve overwhelming battlefield success and more attention to ensuring economic stability at home and relative tranquility in society…. The [17 March presidential] election provides a key opportunity for Vladimir Putin to demonstrate his unshakeable status as the leader of the nation.”
As for impact of the upcoming US election on the Kremlin’s thinking, Mr Petrov concluded as follows:
“…any negotiations regarding the war on Ukraine are unlikely before the election winner is known. Before then, Putin will try to capitalise on war fatigue in the West, as well as cracks in the united front to support Kyiv. His method, as a practitioner of judo, is to apply maximum pressure…. Moscow continues to believe that time is on its side. The challenge for Ukraine and the West is to prove Putin wrong. 2024 will be decisive in showing who prevails.”
For all the brave talk about ‘active defence’ and building up forces for a major offensive in 2025, concerns about Western war fatigue and its implications must surely be resonating in Kyiv irrespective of the outcome of the US election. In December President Volodymyr Zelenskyy, declaring a “new phase” in the war, ordered the construction of strong defensive lines. Although this posture will likely be coupled with testing weak spots in Russia’s lines and continuing strikes against Crimea and Russia’s Black Sea fleet, it must surely be driven in part by the need to sustain as strong a position as possible on the ground as a precaution against being more or less forced to the negotiating table in 2025. Yet, as top Russia expert Fiona Hill noted in a 19 January FT article:
“…we’ve now reached a tipping point between whether Ukraine continues to win in terms of having sufficient fighting power to stave Russia off, or whether it actually starts to lose because it doesn’t have the equipment, the heavy weaponry, the ammunition. That external support is going to be determinative.”
I expect the EU to be able to continue to work around Hungarian Prime Minister Viktor Orbán to support Ukraine. However, a putative deal in the US Congress linking more US aid for Ukraine to border security is now looking less and less likely as Mr Trump pressures Republicans to block any progress on the latter in his own electoral interests. Consistent with the early erosion of the Biden doctrine, Senator Mark Warner (D-Va) wrote on X as follows:
“If we don’t honor our commitment to Ukraine, there’s not a single nation — friend or foe — that will fully trust us again”.
What does all this mean for investors? In a 19 January FT op-ed headlined ‘Should investors care about geopolitics?’ Stuart Kirk reflected on how the outbreak of war triggers an initial dip in equity markets followed by a recovery and subsequent solid performance through the course of the conflict. However, I believe that, in so doing, he misunderstood the nature of 'uncertainty' in such circumstances. A state of uncertainty surely prevails in the run-up to a war (i.e. will there be war or not?); but once a state of war exists — e.g. Russia/Ukraine — there is often far less uncertainty with which investors have to grapple. Of course, war still brings with it a whole herd of 'grey rhinos'; but, in general, investors are adept at ignoring these (for want of being able to price them in, if nothing else) unless or until one or other of them hits us.
Thus, the real challenge for both analysts and investors this year may not lie in assessing the likely course of either the crisis in the Middle East or the Russia/Ukraine war but in grappling with the uncertainty around myriad other potential conflicts which are feeding on the prevailing “chaotic global circumstances”.
Alastair Newton, an alumnus of the LSE, is a professional political analyst who was based in the City of London from 2005 to 2015. Prior to his move to the City, Alastair spent 20 years as a career diplomat with the British Diplomatic Service.
This is a lightly edited — for technical reasons — version of a research note first published by ‘Heteronomics’ on 29 January 2024.
Photo by Алесь Усцінаў
