Bottlenecks and chokepoints: the new global battleground

Persistent geopolitical fragmentation is turning strategic bottlenecks into a durable source of inflation, volatility and investment risk, while creating recurring opportunities for active fixed income investors.

• The rivalry between the US and China has made geopolitical uncertainty more persistent, and the Geopolitical Risk Index is described as being near levels seen during the 9/11 attacks and the second Gulf War.
• Deglobalisation, tariffs and the shift from cost efficiency to supply security are weakening the disinflationary effects of globalisation and contributing to persistent inflation.
• Shipping through the Strait of Hormuz fell close to zero after the US-Iran conflict, while diesel refining margins widened and European natural gas prices more than doubled from a year earlier.
• China controls around 69% of rare-earth mining, 61% of rare earths used for magnets and roughly 88% of global rare-earth processing, giving it significant leverage over aerospace, defence and technology supply chains.
• Semiconductor controls have expanded from advanced chips to production equipment and software, while China has invested more than $100bn in its domestic semiconductor industry and imposed export controls on gallium and germanium.
• Fragmentation is spreading to payment systems, marine insurance and capital markets: the US created a $40bn reinsurance facility for essential shipments, while China has reduced its US Treasury holdings as US interest payments exceed defence spending.

Takeaway: Investors should expect higher inflation, greater volatility and more fragmented liquidity, but the resulting market dislocations may create opportunities for active fixed income strategies; the timing and severity of geopolitical shocks remain uncertain.