In a time when the world is facing unprecedented changes in the energy landscape, geopolitical forces are crucial for understanding the current and future energy markets. “I am absolutely convinced that we are only at the beginning of what could be one of the biggest bull markets in history.”
Geopolitics & Investing
This article is part of a series on the impact of geopolitical developments on investments. This topic will also be discussed at the Investment Officer Fund Event on 30 September in Bussum, the Netherlands.
As Germany prepares for a future without nuclear power, it grapples with whether this will be a strategic advantage or disadvantage for its industrial sector. Meanwhile, China is investing massively in solar and wind power, positioning itself as a world leader in clean energy production and dominating global markets.
Europe’s dependence on critical minerals from emerging markets and China is compelling it to think strategically about its raw materials policy. These dynamics, combined with the enormous energy demands of data centers for AI applications, underscore that energy is not only an issue of sustainable development but also of geopolitical power relations and economic stability.
“It is very tempting to think: we are back in that pre-Covid world. We are ‘back to business as usual’ again. But that certainly won’t be the case.”
“We are facing one of the most challenging periods in world history,” says Philippe Gijsels, BNP Paribas Fortis’ chief strategist.
“The recent share price declines should be viewed in that context. Partly, it is technical, due to the unwinding of the yen-carry trade; partly, it is fundamental, reflecting the slowdown in the US economy and, by extension, the global economy. This suggests that the Goldilocks scenario may no longer be viable.”
Covid, Gijsels argues, was the catalyst for that Goldilocks scenario and accelerated a number of developments. “Recently, you saw inflation drop a bit because the economy is slowing down, and then interest rates also go down. It is very tempting to think: we are back in that pre-Covid world. We are ‘back to business as usual’ again. But that certainly won’t be the case.”
Higher inflation, higher rates
BNP Paribas Fortis anticipates a longer-term rise in inflation and interest rates.
This expectation is mainly due to the fact that we have now entered a transition phase where several major global developments are converging. These include a climate crisis and an energy transition combined with large investment needs. This will be the prelude to a new global economy, which will also have to contend with the highest peacetime debt levels, disruptive innovations, and the consequences of a rapidly aging population and multiglobalisation.
The latter represents the post-war world order—initiated by Bretton Woods—visibly crumbling under the major challenges of our time. “While everyone should be working very hard together at the moment,” says Gijsels, “we are at a juncture where cooperation is far from a reality.” For instance, a form of multiglobalisation is taking place, combined with industrial policies aimed at bringing knowledge and skills in key technologies, such as semiconductors, within national borders. This is accompanied by mounting tensions and changing coalitions worldwide.
‘Yes, we can do this’
Whether this transition to a new world order and a new economy can be successful depends on innovation capacity, argues Gijsels, who is optimistic about it.
“Yes, ‘we can do this.’ Indeed, the wildcard at this stage of world history is innovation. That has the potential to increase productivity substantially. With that, you reduce inflation because technology is, by definition, deflationary. And with that, you can then also reduce those high debt ratios. In this phase, we need people to develop smart grids, but also the batteries of the future. And then we will get there. So, despite all the challenges, I have probably never been so optimistic,” says Gijsels.
“China accounts for a third of the world’s total energy investment.”
Philippe Gijsels, BNP Paribas Fortis
He previously chronicled that vision in the Dutch-language bestseller De Nieuwe Wereldeconomie, the New World Economy (2023), which he wrote with colleague and chief economist Koen de Leus.
When it comes to innovation, the world’s energy transition is central. After all, no economy can run without energy. Despite global concerns about climate developments, innovation in favor of clean energy carriers has not been in short supply. A lot of money is being invested in solar and wind energy, and gradually also in hydrogen, batteries, and smart grids—energy networks connected by a smart measurement and control system. In the current calendar year, some USD 2,000 billion is expected to be invested in carbon-neutral energy. This continues the trend of the past decade, with the world investing more in clean energy than in coal, gas, and oil. The ratio is now 2:1. As a result, clean energy carriers are gradually gaining more momentum among (institutional) investors.
But to stay within the world’s 1.5-degree climate increase target, investment in clean energy needs to rise further. According to the International Renewable Energy Agency (Irena), some 125,000 billion dollars in investment is needed to meet that target by 2050. That amounts to 5,000 billion a year, a fourfold increase in financial commitment.
Investment in clean energy:
Source: IEA.
Also see: World Energy Transitions Outlook 2023, Irena
That is more than a challenge, warns the International Energy Agency (IEA) in its latest World Energy Investment 2024 study. Indeed, the era of cheap borrowing is coming to an end, frustrating some investments. On the other hand, its impact is partly offset by decreasing supply chain pressures and falling prices. For example, the cost of solar panels has fallen 30 percent in the past two years. This means that every dollar invested in solar or wind power currently yields 2.5 times more energy than it did a decade ago.
Also see: World Energy Investment 2024, IEA
Prices of minerals and metals, which are crucial for the energy transition, are also currently falling. This is especially true for metals needed for batteries that can store energy, which is important for electric cars and grid electrification, according to the IEA. The problem is that Europe does not have these minerals itself (or has limited mining on its continent) and is therefore dependent on third parties, such as emerging countries and China.
‘China can grab entire markets’
The latter country is, so to speak, the “elephant in the room” of the energy transition. It has developed a state system that has free market elements. But because it does not have to go to the voters every few years for a mandate, it can develop a long-term vision and strategy. As a result, says Gijsels, “they can grab whole markets. And they do. For instance, China is fully committed to the new global economy, driven by CO2-neutral energy. The country accounts for a third of the world’s total energy investment. By 2023, it has invested more in solar energy than the rest of the world combined, while its production of wind power has increased 55 percent year-on-year.
Xinsanyang
China is now starting to capitalize on those investments and that knowledge: for instance, exports in the so-called Xinsanyang (“the new three”) sectors—solar cells, lithium batteries, and electric cars (EVs)—increased by 30 percent. Besides being a new player in the capital goods market, China has also become the global hub for processing raw materials and minerals.
“They are grabbing whole markets. Nobody believed in that,” says Gijsels. “But now they control the entire commodity market. They have stocks of more than a year for soy, oil, and copper. That means they decide what happens to the price. We have allowed China to control a very large part of that supply chain. Europe will have to position itself between them. But we still have a long way to go there.”
Demand for rare minerals to remain strong
Source: Bloomberg NEF.
The demand for critical minerals in emerging countries, as well as in Asia, comes at a time when there is a growing realisation in these countries that the energy transition is an irreversible fact, as well as that these minerals have become the bloodstream of the economy, as is the case for semiconductors.
Thu Ha Chow, head of fixed income at Robeco in Singapore, thinks this insight could lead to geopolitical alliances around the world starting to shift and change. “I don’t think this will only be positive from a geopolitical perspective. It could be negative if people decide to reserve these critical minerals instead of exporting them. So it could be both negative and positive for the energy transition.”
“The question is where the cost of carbon emissions is ultimately accounted for.”
Thu Ha Chow, Robeco
According to Chow, there is a growing awareness in emerging countries that exploiting and exporting these critical minerals, which go to companies in developed countries to help them decarbonize, could hinder the exporting country’s own decarbonization trajectory. The question is where the cost of carbon emissions is ultimately accounted for. It is seen as emissions from the exporting country, while the other country—the importing country—gets the benefits, namely the electrification of their green car. According to Chow, this is a practice that should be reviewed by international bodies.
“If we extract a critical mineral to help a company, let’s say in a developed country, make electric cars, who bears the carbon cost? It’s considered an exporter’s carbon emissions, right? That’s how we calculate it. Instead, we should think, ‘Okay, actually I’m electrifying my green vehicle, so I should support the financing of companies that extract the minerals, and the end consumers should bear some of the carbon costs that were needed to extract the minerals.’”
Currently, carbon emissions are attributed to production, not use or consumption, and therefore emerging markets bear the greatest burden of carbon emissions through their mineral resources and production. “We need to provide financing to help them reduce emissions, which will not only help the decarbonisation trajectory of emerging markets but also that of developed markets that use these resources. However, because we consider carbon emissions at the point of production, and not at use or consumption, this may discourage the flow of financing that would help these economies decarbonise.”
Listen to Thu Ha Chow, head of fixed income at Robeco in Hong Kong, on differences in carbon accounting between developed and emerging markets:
Extraction costs combined with the question of who should pay for CO2 emissions is particularly sensitive. Emerging countries have long felt that they bear the brunt of the damage and costs of climate change. Admittedly, the United Nations COP climate conferences agreed on financial support from developed countries for EM countries to deal with the consequences. But in practice, little comes of this. At the same time, the financing needs for a successful climate transition in these EM countries are huge. There is talk of $125,000 billion worth of investment to get emerging economies to net-zero by 2050.
Casualties of the energy revolution
IEA chief Fatih Birol recently warned of the potential consequences of these imbalances, in which emerging countries could become the casualties of the energy revolution. “More needs to be done to ensure that investments go where they are most needed, particularly in developing economies where access to affordable, sustainable, and secure energy is currently severely lacking,” Birol said.
Robeco, for its part, focuses on strategies in these types of countries to enable transition investing in both equity and credit strategies in emerging economies. Thus, alpha can be found in all sectors—including those with high carbon intensity.
EM set to become less important asset class
The energy transition, Gijsels at BNP Paribas Fortis also believes, will make geopolitics more important. One consequence, however, is that emerging economies will become less important as an asset class. Investment strategists will start analyzing countries more on an individual level. “What is the geopolitical situation? What is its location like? Who are the allies? What are the industrial policies like? What are the central banks doing? So you start looking at countries individually, like we did 30 years ago.” Gijsels thinks that the market is not sufficiently recognizing that some countries are well-positioned in terms of industrial policy and other factors, while others are less so.
More electricity means higher incomes
Source: IEA, World Bank.
Raw materials as economic lifeblood
Gijsels links another consequence to the energy transition: raw materials are becoming the lifeblood of the global economy. “Because we are moving towards a world of resource scarcity. So I am absolutely convinced that we are only at the beginning of what could well be one of the biggest bull markets in history. And who controls those supply lines is indeed important. It is not for nothing that China and also Russia are very active in Africa and Latin America. So everyone understands that you have to get those supply lines right. Europe is relatively little engaged in that.”
Given the big, systemic changes that could take generations, “Europe should be one and speak with one voice. It is extremely difficult to do that. But the point is if you ask me today, you need an industrial policy, also towards the supply of raw materials and strategic ports, etc. Whether you are politically happy with that or not, if the rest of the world does that and you don’t, then you do have a big problem.”
Listen to Philippe Gijsels, chief strategist BNP Paribas Fortis, on commodities as potentially the biggest bull market in history (in Dutch):
Cees van Lotringen is a writer, journalist and entrepreneur. He is former editor-in-chief of Investment Officer.
Further reading in this series:
- ‘Dancing on the volcano - as long as it lasts’ (22 July)
- China’s sudden electric car boom stirs strategic concerns (1 July)
- An autonomous EU would create a new framework for investors (7 June)
- Europe’s rude awakening: Geopolitics is back (21 May)