Disclaimer

By clicking the "I Accept" button, you agree to abide by the terms and conditions listed below.

Select your country:

Menu Our services in the selected location:
  • No services available for your region.
Select Location:
Remember my selection
Your browser is out of date.

We have been made aware that there are external parties falsely claiming to carry out financial services on behalf of Goldman Sachs (including Goldman Sachs Asset Management International and Goldman Sachs International) in order to market fake investment products and to solicit monetary payments. These external parties may pose as Goldman Sachs through the use of fraudulent communications via email, instant messaging or phone, as well as through the use of fake brochures and other documents containing Goldman Sachs branding and logos.
The Financial Conduct Authority of UK has issued warnings about these fraudulent activities which can be found here and here.
It is important to know that any communication you receive from Goldman Sachs would only come from an @gs.com e-mail address and/or be found on the goldmansachs.com website. Further information regarding how you can protect yourself from fraudulent activity online and how you can contact us about this can be found on the Goldman Sachs Security page, available here.

   

COLD WAR 2.0 

CIO Macro and Market Observations from Multi-Asset Solutions

July 28, 2022  |  8 Minute Read


Maria Vassalou, PhD

Co-Chief Investment Officer, Multi-Asset Solutions

Maria Vassalou, PhD

Amy Yifan Zhou, PhD

Multi-Asset Solutions

Amy Yifan Zhou, PhD


 

The ongoing confrontation between Russia and the West has renewed concerns about a developing Cold War 2.0. Compared to the broad ideological conflicts that took place in the 20th century between the Eastern and Western blocs, the initial phases of Cold War 2.0 have been more targeted and localized. However, it appears likely to do more damage to global economic growth and cooperation—and without nearly all of the silver linings associated with the first one. Considering the economic, political, and humanitarian costs for all sides, Cold War 2.0 may not have a winner. In current conditions, we expect commodities to play a more central role in driving economic growth than they have in previous business cycles. The traditional investment playbook should also be re-assessed to account for elevated geopolitical risks across developed-market (DM) and emerging-market (EM) opportunity sets.

 

Economic Impact of Cold War 1.0

In the 20th century, the world saw a prolonged period of rivalry between the United States and the USSR—as well as among their respective allies. The two blocs represented opposing ideological beliefs and engaged in a wide range of competition, from military development to economic growth. Each side hoped to demonstrate the superiority of its own system and encourage others to emulate it. In the 1950s and 60s, the US economy grew about 3.8% per year, while the Soviet economy grew at a slightly higher rate of 5% per year.1 Centrally-planned projects on industrialization and defense developments were a main driver of Soviet growth.

 

Countries in the Eastern and Western blocs also sought to strengthen their growth through mutual assistance and trade liberalization. The US enacted a number of foreign aid programs that played an important role in Europe’s post-war revival, including the US Marshall Plan, which provided some $13 billion to finance rebuilding efforts after the war and is widely recognized as an economic and foreign policy success. Trade liberalization programs such as the GATT also boosted economic gains in the Western bloc. In a somewhat parallel fashion, the USSR formed the Council for Mutual Economic Cooperation (Comecon) among socialist countries, though its impact was limited.

 

The Soviet economy started to lose steam in the 1970s. After a short-lived windfall from the energy crisis, the expensive arms race eventually took a toll on its growth. The decline continued throughout the 1980s oil glut and contributed to the Eastern bloc’s formal dissolution in 1991. The US managed to overcome its own setbacks in the ’70s to ’80s and maintained an average growth rate above 3% during this period.

 

This Time is Different

This year’s geopolitical tension has its origin in a regional conflict between Russia and Ukraine but quickly evolved into global confrontation as Russia weaponized its commodity exports to threaten the economic welfare and energy security of Ukraine’s Western supporters. The situation is sometimes dubbed Cold War 2.0, since it recalls the East/West power struggle in the 20th century—but with greater economic damage this time around.

 

During Cold War 1.0, the two blocs grew independently despite the everlasting arms race. In recent years, however, Europe’s increased reliance on energy imports presents an opportunity for Russia to inflict economic pain on countries that it deems “unfriendly.” The US is in a better position in terms of energy independence, but it is not insulated from the perils of elevated living costs and production costs. Weaker purchasing power is likely to dampen household consumption, whereas the reduced willingness to produce can worsen the supply chain disruptions that have been hurting the global economy for quite some time. As for Russia, oil and gas exports still account for nearly half of the country’s revenue. For the time being, the reduced quantity of these exports are being offset by higher prices, but the damages are likely to sink in over time. Western sanctions have restricted Russian oil products to trading in smaller markets with steeper discounts, whereas expenses continue to accumulate from the hot war on the ground with Ukraine. If the global economy does enter into a period of material slowdown, energy prices would likely decline along with demand, further undermining Russia’s position.

 

Cold War 2.0 is also likely to be more divisive than Cold War 1.0. At the start of the Russia-Ukraine conflict, EU countries promptly embraced a unified stance toward the humanitarian tragedy. However, member states have been taking much longer to agree on the implementation of Russian gas sanctions given their varying degree of reliance and ability to adjust. It is unlikely that a modern-day Marshall Plan or some other form of international assistance can immediately solve Europe’s gas dilemma, since the distribution infrastructure takes years to build and re-route. On the other hand, traditional Russian allies, such as Kazakhstan, have been taking a distance during the current stand-off. Russia has also been seeking partnership with China. Historically, Russia-China relations have been more strained than many Westerners appreciate, even during the original Cold War. Asking for China’s support during Cold War 2.0 is creating new challenges to the two countries’ relationship as it runs counter to China’s close ties with Europe.

 

In contrast to Cold War 1.0, this year China has been working carefully to maintain a balanced relationship with Russia and the Western countries. The size of the Chinese economy now ranks second in the world, only after the US and much ahead of Russia who ranks the eleventh. Given China’s current stance, there should be very limited risks of it joining forces with Russia and engaging in direct conflict with US and Europe during Cold War 2.0. However, as China continue to grow its international influence and competitiveness, it is not unlikely to see more friction between China and the US down the road, who may view China’s rise as a challenge to its dominance. In recent years, China has also been pushing for the internationalization of the RMB as a reserve currency and building up its own cross-border payment and clearing systems that are in parallel to the Western mechanism. The dominance of dollar-reserves and dollar-based financial infrastructure face few challenges today, but emerging alternatives should increase the possibility for bypassing sanctions, thus making them less effective in the future.

 

When we turn to the geopolitical considerations, the outlook for Cold War 2.0 looks even gloomier. Russia’s original objective may have been tightening its grip on Ukraine and preventing it from ever joining NATO, which in recent decades has welcomed several other former Soviet and Eastern Bloc countries. However, Russia’s military aggression against Ukraine shifted public perception of risk in the region and prompted new countries to seek enhanced protection against Russian invasion. Finland and Sweden went so far as to abandon their long-held neutrality and apply for NATO membership; if the accession deal is completed, it would mark the most significant enlargement of NATO in years and strategically enhance the alliance’s presence in the Baltic region. Such development runs counter to what Russia may have intended and further escalates the standoff between the two sides. Future tit-for-tats are possible, and the path forward appears highly uncertain.

 

 

Exhibit 1: Comparing Cold War 1.0 vs 2.0

 

 

Investment Implications

For quite some time, commodity shocks have become less disruptive to economic growth as a result of improved supply, enhanced efficiency, and the availability of alternative energy sources. Yet the current situation shows that markets have largely overlooked the geopolitical vulnerabilities in global energy supply-demand balances. It required the exploitation of these vulnerabilities in a time of war to change that. With Cold War 2.0 still evolving, we expect commodities to play a more central role in driving economic growth, whereas traditional central banking tools are likely to be more limited in their ability to smooth out externally-driven growth and inflation shocks.

 

Subsequently, Cold War 2.0 may end up re-underwriting the list of DM safe havens and could weigh on the outlook for EM assets. In the near term, the US dollar has already outperformed European currencies as well as the Japanese yen (JPY). The outlook for traditional safe havens such as JPY may continue to be overshadowed by the respective economy’s dependence on energy imports. For EM, dollar strength and reduced global risk appetite also implies a more challenging path forward. While commodity exporters may have some capacity to offset growth and inflation challenges with trade balance improvements, countries that are reliant on food and fuel imports can be particularly vulnerable, even if they are not directly trading with Russia.

 

Implications on global diversification is more nuanced. On one hand, increased fragmentation under Cold War 2.0 means lower correlation and better diversification opportunities, but investors should also take into account the heightened political risks that may arise in the Cold War 2.0 era. For example, if China and India are perceived to be too closely aligned with Russia, there is a risk that they may face retaliations themselves and become secondary targets of Western sanctions. In the event of sudden regulatory changes, the free flow of capital may not be sustained. To reiterate, we continue to think international diversification has its key benefits, but the opportunities should be evaluated carefully at a time when geopolitical risks are being re-priced into markets.

 

 

Related Insights

  • GSAM Connect

    The Micro Footprints Of Macro Risks

    29 June 2022 Household finance can provide differentiated micro-level perspectives into macro business cycles. In today’s accelerated monetary tightening cycle, the risks of equity selloff and a housing slowdown are top of mind. The timing of policy actions will be important for limiting the transmission of asset price weakness into credit risk, and the choices consumers make will help determine the path of the household credit cycle and the depth of any economic downturn that may result. Read More
  • GSAM Connect

    Finding Market Bottom: The Cause Is The Cure

    22 July 2022 The Federal Reserve (Fed) has aggressively engineered tighter financial conditions with the express goal of reducing aggregate demand and ultimately inflation. As a result, the market has experienced higher short- and long-term interest rates, wider credit spreads, a stronger US dollar, and most notably, lower equity prices. Learn why we believe the old adage “Don’t fight the Fed” may be both the problem and the solution. Read More
  • GSAM Featured Insights

    Beyond the Headline: Examining Recent Dispersion in Growth Equity

    13 July 2022 The COVID-19 pandemic pulled forward demand for technology, accelerating both the trajectories of and investor interest in technology-enabled growth companies, but more recent macro uncertainties have led to greater performance dispersion across companies and funds. How has this affected private market dynamics and what implications has this had on investments? Read More

Start the Conversation

Committed to providing you with the insights you need to build your practice.

 

 

1 Source: Maddison, A. (2001), The World Economy: A Millennial Perspective. 

Disclosures

The views expressed herein are as of the date of first use as stated below and subject to change in the future.   Individual portfolio management teams for Goldman Sachs Asset Management may have views and opinions and/or make investment decisions that, in certain instances, may not always be consistent with the views and opinions expressed herein.

THIS MATERIAL DOES NOT CONSTITUTE AN OFFER OR SOLICITATION IN ANY JURISDICTION WHERE OR TO ANY PERSON TO WHOM IT WOULD BE UNAUTHORIZED OR UNLAWFUL TO DO SO.

Prospective investors should inform themselves as to any applicable legal requirements and taxation and exchange control regulations in the countries of their citizenship, residence or domicile which might be relevant.

This information discusses general market activity, industry or sector trends, or other broad-based economic, market or political conditions and should not be construed as research or investment advice. This material has been prepared by Goldman Sachs Asset Management and is not financial research nor a product of Goldman Sachs Global Investment Research (GIR). It was not prepared in compliance with applicable provisions of law designed to promote the independence of financial analysis and is not subject to a prohibition on trading following the distribution of financial research. The views and opinions expressed may differ from those of Goldman Sachs Global Investment Research or other departments or divisions of Goldman Sachs and its affiliates. Investors are urged to consult with their financial advisors before buying or selling any securities. This information may not be current and Goldman Sachs Asset Management has no obligation to provide any updates or changes.

Views and opinions expressed are for informational purposes only and do not constitute a recommendation by Goldman Sachs Asset Management to buy, sell, or hold any security, they should not be construed as investment advice.

Economic and market forecasts presented herein reflect a series of assumptions and judgments as of the date of this presentation and are subject to change without notice. These forecasts do not take into account the specific investment objectives, restrictions, tax and financial situation or other needs of any specific client. Actual data will vary and may not be reflected here. These forecasts are subject to high levels of uncertainty that may affect actual performance. Accordingly, these forecasts should be viewed as merely representative of a broad range of possible outcomes. These forecasts are estimated, based on assumptions, and are subject to significant revision and may change materially as economic and market conditions change. Goldman Sachs has no obligation to provide updates or changes to these forecasts. Case studies and examples are for illustrative purposes only.

Past performance does not guarantee future results, which may vary. The value of investments and the income derived from investments will fluctuate and can go down as well as up. A loss of principal may occur.

United Kingdom: In the United Kingdom, this material is a financial promotion and has been approved by Goldman Sachs Asset Management International, which is authorized and regulated in the United Kingdom by the Financial Conduct Authority.

European Economic Area (EEA): This material is a financial promotion disseminated by Goldman Sachs Bank Europe SE, including through its authorised branches ("GSBE"). GSBE is a credit institution incorporated in Germany and, within the Single Supervisory Mechanism established between those Member States of the European Union whose official currency is the Euro, subject to direct prudential supervision by the European Central Bank and in other respects supervised by German Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufischt, BaFin) and Deutsche Bundesbank.

Switzerland: For Qualified Investor use only – Not for distribution to general public. This is marketing material. This document is provided to you by Goldman Sachs Bank AG, Zürich. Any future contractual relationships will be entered into with affiliates of Goldman Sachs Bank AG, which are domiciled outside of Switzerland. We would like to remind you that foreign (Non-Swiss) legal and regulatory systems may not provide the same level of protection in relation to client confidentiality and data protection as offered to you by Swiss law.

Asia excluding Japan: Please note that neither Goldman Sachs Asset Management (Hong Kong) Limited (“GSAMHK”) or Goldman Sachs Asset Management (Singapore) Pte. Ltd. (Company Number: 201329851H ) (“GSAMS”) nor any other entities involved in the Goldman Sachs Asset Management business that provide this material and information maintain any licenses, authorizations or registrations in Asia (other than Japan), except that it conducts businesses (subject to applicable local regulations) in and from the following jurisdictions: Hong Kong, Singapore, Malaysia, India and China. This material has been issued for use in or from Hong Kong by Goldman Sachs Asset Management (Hong Kong) Limited, in or from Singapore by Goldman Sachs Asset Management (Singapore) Pte. Ltd. (Company Number: 201329851H) and in or from Malaysia by Goldman Sachs (Malaysia) Sdn Berhad (880767W).

Australia: This material is distributed by Goldman Sachs Asset Management Australia Pty Ltd ABN 41 006 099 681, AFSL 228948 (‘GSAMA’) and is intended for viewing only by wholesale clients for the purposes of section 761G of the Corporations Act 2001 (Cth). This document may not be distributed to retail clients in Australia (as that term is defined in the Corporations Act 2001 (Cth)) or to the general public. This document may not be reproduced or distributed to any person without the prior consent of GSAMA. To the extent that this document contains any statement which may be considered to be financial product advice in Australia under the Corporations Act 2001 (Cth), that advice is intended to be given to the intended recipient of this document only, being a wholesale client for the purposes of the Corporations Act 2001 (Cth). Any advice provided in this document is provided by either Goldman Sachs Asset Management International (GSAMI), Goldman Sachs International (GSI), Goldman Sachs Asset Management, LP (GSAMLP) or Goldman Sachs & Co. LLC (GSCo). Both GSCo and GSAMLP are regulated by the US Securities and Exchange Commission under US laws, which differ from Australian laws. Both GSI and GSAMI are regulated by the Financial Conduct Authority and GSI is authorized by the Prudential Regulation Authority under UK laws, which differ from Australian laws. GSI, GSAMI, GSCo, and GSAMLP are all exempt from the requirement to hold an Australian financial services licence under the Corporations Act of Australia and therefore do not hold any Australian Financial Services Licences. Any financial services given to any person by GSI, GSAMI, GSCo or GSAMLP by distributing this document in Australia are provided to such persons pursuant to ASIC Class Orders 03/1099 and 03/1100. No offer to acquire any interest in a fund or a financial product is being made to you in this document. If the interests or financial products do become available in the future, the offer may be arranged by GSAMA in accordance with section 911A(2)(b) of the Corporations Act. GSAMA holds Australian Financial Services Licence No. 228948. Any offer will only be made in circumstances where disclosure is not required under Part 6D.2 of the Corporations Act or a product disclosure statement is not required to be given under Part 7.9 of the Corporations Act (as relevant).

Canada: This presentation has been communicated in Canada by GSAM LP, which is registered as a portfolio manager under securities legislation in all provinces of Canada and as a commodity trading manager under the commodity futures legislation of Ontario and as a derivatives adviser under the derivatives legislation of Quebec. GSAM LP is not registered to provide investment advisory or portfolio management services in respect of exchange-traded futures or options contracts in Manitoba and is not offering to provide such investment advisory or portfolio management services in Manitoba by delivery of this material.

Japan: This material has been issued or approved in Japan for the use of professional investors defined in Article 2 paragraph (31) of the Financial Instruments and Exchange Law by Goldman Sachs Asset Management Co., Ltd.

Colombia: Esta presentación no tiene el propósito o el efecto de iniciar, directa o indirectamente, la adquisición de un producto a prestación de un servicio por parte de Goldman Sachs Asset Management a residentes colombianos. Los productos y/o servicios de Goldman Sachs Asset Management no podrán ser ofrecidos ni promocionados en Colombia o a residentes Colombianos a menos que dicha oferta y promoción se lleve a cabo en cumplimiento del Decreto 2555 de 2010 y las otras reglas y regulaciones aplicables en materia de promoción de productos y/o servicios financieros y /o del mercado de valores en Colombia o a residentes colombianos.

Al recibir esta presentación, y en caso que se decida contactar a Goldman Sachs Asset Management, cada destinatario residente en Colombia reconoce y acepta que ha contactado a Goldman Sachs Asset Management por su propia iniciativa y no como resultado de cualquier promoción o publicidad por parte de Goldman Sachs Asset Management o cualquiera de sus agentes o representantes. Los residentes colombianos reconocen que (1) la recepción de esta presentación no constituye una solicitud de los productos y/o servicios de Goldman Sachs Asset Management, y (2) que no están recibiendo ninguna oferta o promoción directa o indirecta de productos y/o servicios financieros y/o del mercado de valores por parte de Goldman Sachs Asset Management.

Esta presentación es estrictamente privada y confidencial, y no podrá ser reproducida o utilizada para cualquier propósito diferente a la evaluación de una inversión potencial en los productos de Goldman Sachs Asset Management o la contratación de sus servicios por parte del destinatario de esta presentación, no podrá ser proporcionada a una persona diferente del destinatario de esta presentación.

This material is provided for informational purposes only and should not be construed as investment advice or an offer or solicitation to buy or sell securities. This material is not intended to be used as a general guide to investing, or as a source of any specific investment recommendations, and makes no implied or express recommendations concerning the manner in which any client’s account should or would be handled, as appropriate investment strategies depend upon the client’s investment objectives.

Bahrain: This material has not been reviewed by the Central Bank of Bahrain (CBB) and the CBB takes no responsibility for the accuracy of the statements or the information contained herein, or for the performance of the securities or related investment, nor shall the CBB have any liability to any person for damage or loss resulting from reliance on any statement or information contained herein. This material will not be issued, passed to, or made available to the public generally.

Kuwait: This material has not been approved for distribution in the State of Kuwait by the Ministry of Commerce and Industry or the Central Bank of Kuwait or any other relevant Kuwaiti government agency. The distribution of this material is, therefore, restricted in accordance with law no. 31 of 1990 and law no. 7 of 2010, as amended. No private or public offering of securities is being made in the State of Kuwait, and no agreement relating to the sale of any securities will be concluded in the State of Kuwait. No marketing, solicitation or inducement activities are being used to offer or market securities in the State of Kuwait.

Oman: The Capital Market Authority of the Sultanate of Oman (the "CMA") is not liable for the correctness or adequacy of information provided in this document or for identifying whether or not the services contemplated within this document are appropriate investment for a potential investor. The CMA shall also not be liable for any damage or loss resulting from reliance placed on the document.

Qatar: This document has not been, and will not be, registered with or reviewed or approved by the Qatar Financial Markets Authority, the Qatar Financial Centre Regulatory Authority or Qatar Central Bank and may not be publicly distributed. It is not for general circulation in the State of Qatar and may not be reproduced or used for any other purpose.

Saudi Arabia: The Capital Market Authority does not make any representation as to the accuracy or completeness of this document, and expressly disclaims any liability whatsoever for any loss arising from, or incurred in reliance upon, any part of this document. If you do not understand the contents of this document you should consult an authorised financial adviser.

UAE: This document has not been approved by, or filed with the Central Bank of the United Arab Emirates or the Securities and Commodities Authority. If you do not understand the contents of this document, you should consult with a financial advisor.

Israel: This document has not been, and will not be, registered with or reviewed or approved by the Israel Securities Authority (ISA”). It is not for general circulation in Israel and may not be reproduced or used for any other purpose. Goldman Sachs Asset Management International is not licensed to provide investment advisory or management services in Israel.

Jordan: The document has not been presented to, or approved by, the Jordanian Securities Commission or the Board for Regulating Transactions in Foreign Exchanges. This material is provided for informational purposes only and should not be construed as investment advice or an offer or solicitation to buy or sell securities. This material is not intended to be used as a general guide to investing, or as a source of any specific investment recommendations, and makes no implied or express recommendations concerning the manner in which any client’s account should or would be handled, as appropriate investment strategies depend upon the client’s investment objectives.

Confidentiality

No part of this material may, without Goldman Sachs Asset Management’s prior written consent, be (i) copied, photocopied or duplicated in any form, by any means, or (ii) distributed to any person that is not an employee, officer, director, or authorized agent of the recipient.

Date of First Use: July 28, 2022.

286606-OTU-1645492

Please enter your email address to continue reading.

Confirm Your Access


An email has been sent to you to verify ownership of your email address.

Please verify the link in the email by clicking the confirmation button. Once completed, you will gain instant access to our insights.

If you did not receive the email from us please check your spam folder or try again.