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INVESTMENT STRATEGY QUARTERLY

which was not a given at the start of the war—has prompted western
nations to increase their support for Ukraine’s military and economy
with total US support reaching around $113 billion (about 0.5% of US Energy and defence trends are undergoing a
GDP). However, we view the spring and summer as a potential structural transformation driven by the longer-
turning point in the war. Advances by both sides are expected to slow term policy implications of the war.
substantially, potentially settling into a frozen conflict on the nearly
600-mile front in eastern Ukraine. Should this occur, the question for
markets will be whether conditions support the start of a resolution advanced technology prior to the invasion to include legacy and
process. Recent headlines have indicated that western leaders are mature sectors with high concentration risk. Oil, natural gas, and
beginning to plan around a post-war scenario, and the key factors energy infrastructure are likely to see persistent policy impacts
that could form an off-ramp are twofold: as the availability and expansion of these economic inputs is
more acutely seen as a core national security interest. This trend
1. Will Ukraine and western allies see any move toward a peace
settlement as durable and sustainable? is likely to drive new investments into securing and diversifying
energy supplies with a focus on avoiding concentrations that
2. Will Russian president Vladimir Putin assess that the costs of could lead to future vulnerabilities, such as with critical minerals
continuing the war outweigh the benefits? for renewables technologies.

Both of these factors support a period of heightened escalation On defence, global military spending will be on a longer-term
potential before any off-ramp becomes a clearer possibility. growth trajectory as governments invest in military capabilities to
Ukraine and the western coalition will look to increase the costs for deter new wars and conflicts among nations. The Biden
Russia to deter similar action in the future, and Russia is likely to administration’s recent National Security Strategy describes the
challenge western unity and solidify control over currently decade ahead as “a significant inflection point” that sees renewed
occupied territory to increase its leverage in any settlement tensions between global powers. From a US standpoint, investment
negotiations. This generally positions the first half of this year as an in defence will particularly be driven by the desire among
‘escalate to de-escalate’ setup—a military strategy term which can policymakers to project a credible degree of capability for the US to
be adopted to fit the trajectory of the conflict. We would expect defend its security interests in multiple hotspots as this global
market volatility at the beginning of any escalation, but any off- competition increases. A recent expansion and escalation of
ramp would be viewed as a market positive. tensions with China will be a further tailwind for increased

It is also important to consider less optimistic paths. The two defence spending, in our view. A lesson learned from Russia’s
more concerning possibilities include a protracted war that invasion of Ukraine is that the threat of severe economic sanctions
continues to place a drag on global economic growth and an is not sufficient as a means of deterrence, which will place
expansionary conflict that sees a direct confrontation between renewed emphasis on military power as a critical national security
NATO forces and Russia. A principal Russian goal would be to consideration.
degrade support for Ukraine among western allies. An
environment of persistent inflation, mounting domestic fiscal US-CHINA RELATIONSHIP
challenges, and no end in sight to the conflict could weaken unity Economic competition between the US and China is here to stay,
among western allies and ease Russia’s path toward heightened with the Biden administration taking a wide-reaching approach to
regional power. A more escalatory path to the conflict involves a its “competition, not conflict” China agenda. Bilateral relations
decision by Russia’s policymakers that a war lost to NATO directly deteriorated ahead of a long-awaited trip by Secretary of State
is less damaging to the stability of the Putin regime than losing a Anthony Blinken to China following the discovery of a Chinese-
war to Ukraine. While this path may be unlikely at this stage, the operated balloon in US airspace, which was postponed as bilateral
range of possibilities related to the conflict warrant continued tensions increased. The Chinese government additionally ratcheted
caution given the level of uncertainty ahead. up its criticism of US tech restrictions, describing the policies as
“containment, encirclement, and suppression.” These developments
Even as markets look to a potential post-war scenario, we expect point to the US and China entering a period of heightened tensions
certain sector impacts to be longer lasting. Particularly, energy and an increasingly combative tone in the bilateral relationship,
and defence trends are undergoing a structural transformation elevating the risk level around potential future flashpoints such
driven by the longer-term policy implications of the war. For as maritime accidents in the Taiwan Strait or South China Sea.
energy, part of the war’s impact has been an expansion of
national security concerns around economic linkages from

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