Scary headlines and market risks are at the center of the conversation between John Hockers, co-head of Investment Analytics, and Brian Jacobsen, senior investment strategist at Allspring Global Investments.


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Brian Jacobsen: I’m Brian Jacobsen, senior investment strategist at Allspring Global Investments, and you’re listening to On the Trading Desk®. Today we’re discussing some spooky topics with a Halloween theme. And joining us today is John Hockers, co-head of Investment Analytics, who will be providing his insights on these topics. So, thanks for being here, John.

John Hockers: Yeah, happy to be here, Brian.

Brian: All right, John. So, we’re going to go over a few of the scarier headlines and maybe risks that our investment teams have been thinking about. What would be maybe a couple geopolitical issues that are top of mind for you and the Investment Analytics team?

John: Yeah, I think there’s two that come to mind. The first is obviously the war between Russia and Ukraine and the second is what’s been happening with China and Taiwan. So maybe if I start with Russia and Ukraine, there are certainly some scary parts to the markets in terms of potential escalation there in the conflict. When we look at that escalation, the most likely escalation would be for Belarus to join on the side of Russia. And they were already part of the initial invasion and you could see more Belarussian troops being engaged in the war effort there. That would, I think, be an escalation that the markets wouldn’t be thrilled with, but probably wouldn’t be as extreme as some of the other possible scenarios. Those more extreme scenarios would be potentially a conflict between a NATO member in Russia, an expansion of the war where maybe it spills over into the Baltic nations or into Poland, and then what’s been getting a lot of chatter lately is the potential use of tactical nuclear weapons by Russia. I think if that were to happen, that would be quite an extreme event and you would see a pretty massive selloff in equity markets, especially markets close to the conflict. So Eastern Europe, Poland, places like that would likely sell off the most. But I think globally around the world, you’d get a very much a risk-off trade. That would be quite ugly for markets. But I will say on the flip side, if we do get a resolution to that conflict, I think that would alleviate a lot of fears in the market and it could unleash a pretty strong rally, as well.

Brian: Yeah, and I think that really ties in also to the economic picture too, if we think about the recession risks in Europe. If Europe is in a recession, it’s likely to stay there until Russia and Ukraine, the situation is resolved or until they somehow wean themselves off of the gas and oil that they’ve been importing from Russia since they have these sky-high energy prices. And in order to wean themselves off of that, that doesn’t happen over the course of months. And then from an investing perspective, we have to consider whether markets have properly priced in the timing, the duration, and the depth of the recession that they’re in. But then that recession could almost resolve itself very quickly if there is a resolution there. So almost a binary outcome, it seems like over there in Europe. But you had mentioned about China and Taiwan. What are your thoughts around that?

John: Yeah, this has been an issue that goes back many years, right? And the island of Taiwan, for those who don’t know, is a small island where the democratic part of the original Chinese government retreated to back when the revolution occurred after World War II. And if you look at what has been the status quo there for many years is that the U.S. and other nations don’t recognize Taiwan as a sovereign country, but they recognize that it is in an interesting state of flux, relative to its relationship with China. And China has been content for quite some time with that status quo, but always having the desire to reunify with Taiwan. I think what we’re seeing now, and we just heard comments from the U.S. Secretary of State similar to this, is that that timetable for reunification is likely to be accelerated, perhaps something that might occur in the next five years or so with the current presidential regime in China. So, if that reunification were to be done through military force, I think the market movements would also be quite extreme. There’re three areas that I can think of that would be directly affected by military force between China and Taiwan. So first off, you would have Taiwanese securities. They’re quite prominent in the emerging market indices. I think Taiwanese securities would be likely suspended for some period of time in terms of trading activity. There could then also be some type of sanctions levied on China and Chinese securities. And then I think the third part of the impact would be on the side of international trade. And you would have a variety of international trade that would be disrupted or halted, based on the conflict. So you would have the direct impacts in the securities in both Taiwan and China and then I think the trade issues that would arise.

Brian: A major contribution to the inflation that we’re experiencing has been the supply chain disruptions, China not really backing off of its zero-COVID policy, and the possibility that going forward, even though we’ve seen improvements in supply chains, that we could see these almost like punctuated problems with supply chains and more spikes in the inflation numbers going forward, making the Fed’s (Federal Reserve) job that much more challenging. And it kind of looks like we’re going down the path of having a recession. Hopefully, it’s going to be a mercifully mild recession in the United States at some point in 2023. But if you do get those supply chain disruptions from the China-Taiwan situation, then any kind of mild recession could be much deeper and longer lasting. And so that would be a very challenging environment for investors to be navigating. One thing that I also notice is that when looking at like the inflation basket, so the consumer basket in different countries, the amount that, say, food represents in those baskets. Here in the United States, it’s a relatively small part of the consumer basket. But in a lot of those emerging markets, food makes up a much larger share. And food prices really went higher over the last year or so. Could you talk a little bit about the issue of food insecurity and how that plays into some of the risks that you might see?

John: It’s exactly like you said that in the developing world, a large percentage of people’s income goes towards food. So having events like what happened with Russia invading Ukraine, Ukraine was commonly referred to as the breadbasket of Europe because of all the wheat and corn that they were producing food for Europe and really for the rest of the world, by taking that supply offline, it creates a situation where you exacerbate the inflation issues we’re seeing on food. You exacerbate the risk of famine and hunger in a variety of places in the world. While that’s not a good thing, markets tend to ignore that. Equity markets and fixed income markets tend to ignore some of that pain on the famine and hunger side until it creates unrest in those countries, right? And I think that is where we are today. The risk of civil unrest in countries is growing because so much of people’s income is being dedicated towards food. And you can imagine if you’re going hungry, you tend to have less to lose. And so, when you have that civil unrest develop, you could see nations in Africa, the Middle East, and Asia, protests could start to develop in those nations. And you could have riots that would lead to potentially local market selloffs or even the suspension of trading in some markets if the unrest was great enough. So yeah, I think that’s an excellent point. And I know, Brian, you’ve thought about energy insecurity, as well.

Brian: Yeah. And we’ve really had a few reminders over the years about just how dependent we are on stable and low-cost energy. Grid failures and price spikes, they impose real costs on people. But imagine having to go a few hours without electricity and then imagine if those hours stretch into days, right? I mean, many people around the world know what that’s like, but they’re typically in some of these lower income countries. But with grid failures, sudden spikes in energy prices, and the prospect of rationing in Europe, it’s pretty clear that a lot needs to be done to improve energy security. Some sources of energy are more reliable than others, so there needs to be energy storage, diversity, and distribution. It’s a really complicated topic and some of the technological solutions can then open up the issue of, say, cybersecurity. We’ve seen hacks of production plants and distribution networks. Energy security and cybersecurity are really going hand-in-hand and it all needs a major upgrade. So, when we’re thinking about it from that investing angle, we can think about who is most vulnerable to energy and cyber problems and then who are the ones to build the solutions. And so, there are some of those opportunities there.

John: That’s a great point about cybersecurity. That’s one of our emerging risks that we’re starting to pay more attention to on our team and certainly one of those scary risks that we see. And I think you’re correct in linking that to energy insecurity. The cybersecurity risks right now, many of them are being driven by Russia. And I think Russia views that as a negotiating tactic. If they can create more pain in the energy markets, they can likely get the West to back Ukraine less and maybe push for a peace agreement. And so, I think we could see Russia engage in cyber-attacks on U.S. and European energy infrastructure. And that, I think, gets right to the point of your energy insecurity comment. It could certainly be exacerbated by that.

Brian: Yeah. So, any final thoughts or maybe words of optimism as we go into Halloween and think about the candy that you might get and anything positive that you can think about as we go into the end of the year here?

John: I will say as a studier of the history of markets, markets do like to bottom in October. Can’t guarantee it’s going to bottom this October. But the Halloween time, the markets tend to get scared, but they also tend to bottom in October, thinking back to what happened in 2008. You can go all the way back to 1987 with the crash. That was in October. So historically, as we get into the Christmas season, as we get into the winter months, they tend to be more positive for equity markets. So, that is certainly, I think, something we could look forward to. Maybe we do get a bottom here, especially if the Fed signals that they may be pausing at some point in the near future. And then, as I mentioned earlier, I think any resolution in the conflicts around the world, any softening in the rhetoric between China and Taiwan, or an actual peace treaty between Russia and Ukraine, I think could really ignite a strong move upward in equity markets.

Brian: Oh, well, thank you for that, John. And I hope that your Halloween basket is full of the full-size candy bars and none of those little mini fun size candy bars. So, thanks so much for being here.

John: I completely agree on the candy bar issue, too. Thanks for having me.

Brian: All right. Well, that wraps up this episode of On the Trading Desk®. If you’d like to read more market insights and investment perspectives from Allspring Global Investments, you can find them at our firm’s website, To stay connected to On the Trading Desk® and listen to past and future episodes of the program, you can subscribe to the podcast on Apple Podcasts, Spotify, or wherever you get your podcasts. Until next time, I’m Brian Jacobsen; stay informed.


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