Proactive recently sat down with HANetf’s head of research Tom Bailey to discuss the intricate dynamics unfolding in the world's markets amid escalating geopolitical tensions and ongoing battles against inflation.
Bailey sheds light on the noticeable uptick in oil prices, the growing allure of gold as a safe haven, and the robust performance of the Future of Defence UCITS ETF (NATO).
He also delved into the complex interplay between geopolitics, defence, clean energy, and critical materials, offering investors a nuanced perspective on navigating the rapidly evolving landscape.
Thomas Warner (TW): It's been an enormously significant week in the markets with a lot of geopolitical tensions, changes, and anticipation of things happening over in the US to do with interest rates. In short, plenty is going on. Who better than you to tell us a bit about what you've been seeing out there?
Tom Bailey (TB): Yeah, one of the principal reactions to events last week has been an uptick in the oil price. We've also seen growing interest in gold in our own range of ETFs and ETCS. This is typical for such a shocking geopolitical event; investors carry out a flight to safety to something like gold, which is seen as a way to protect in perilous times.
TW: You've got a lot of ETFs exposed to geopolitical shocks. One of them, your NATO ETF, which is defence focused, has had a relatively good week. Can you tell us more about it?
TB: It's had an uptick in performance with growing interest. When shocking geopolitical events occur, investors go by defence stocks, evident in the prices of major defence manufacturers after events like the war in Ukraine last year.
But we put this in a broader context of geopolitical instability, growing competition between the US and China, the conflict between Ukraine and Russia, and NATO’s support of Ukraine.
This new geopolitical era is forcing governments to step up their defence spending and invest in renewing military equipment. Our NATO ETF captures industrial defence firms and cybersecurity, a core part of any national defence strategy nowadays.
TW: We’ve heard talks about the return to a bipolar world, with nations building new supply chains and cutting out China, especially in rare earth metals. Have you observed this theme across your ETFs?
TB: Absolutely. The US and Europe are realising the need for domestic manufacturing of key components for clean technologies to achieve decarbonisation goals and reduce reliance on a global supply chain involving China.
Initiatives like the Inflation Reduction Act in the US and the EU Green Deal are geopolitically motivated to ensure self-reliance. There’s also a focus on boosting critical materials production to avoid geopolitical vulnerabilities.
TW: Can you elaborate on the role of critical materials in this geopolitical landscape, especially considering the push for decarbonisation?
TB: Certainly. Even if you’re producing solar panels domestically, if you’re importing metals and materials needed for them, there’s a geopolitical vulnerability. The US is taking initiatives to expand its lithium production, vital for battery tech and renewable energies.
Our Sprott energy transition materials ETF, with about 25% lithium miners, reflects the support from countries and regions trying to build up their own capacity for producing and processing these materials.
TW: It seems like a complex interplay between geopolitics, defence, clean energy, and critical materials. How should investors navigate this landscape?
TB: Investors should consider the broader geopolitical context and the evolving landscape of defence and clean energy. Our range of ETFs, like the NATO ETF focusing on defence and cybersecurity and the Sprott energy transition materials ETF, offer insights and opportunities in this quickly evolving landscape, balancing the challenges and opportunities arising from geopolitical tensions and the push for decarbonization.
It’s a time of rapid change and complexity, but also of significant opportunities for those who can navigate this landscape effectively. Our ETFs are designed to help investors do just that, offering exposure to sectors that are pivotal in this geopolitical and environmental context.
(Note: The interview has been edited for clarity and length while maintaining the integrity of the quotes provided by the interviewee.)