4. Geopolitics: New alliances, state capitalism and a diverging electorate

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4. Geopolitics: New alliances, state capitalism and a diverging electorate

Global economics and policy trends

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4. Geopolitics: New alliances, state capitalism and a diverging electorate

What we said
We highlighted several dimensions of geopolitical risk for 2026: persistent US‑China rivalry, the forging of new alliances, the rise of state capitalism, and a continued erosion of trust in political leadership.

How it has played out

Geopolitics front and centre
Geopolitics has dominated 2026, with the US at the core of many developments. These include the dramatic capture of Venezuelan leader Nicolás Maduro and his wife, renewed speculation about a US bid to purchase Greenland, and, most importantly, the escalation of hostilities in the Middle East following the joint US‑Israeli bombing campaign of Iran that began in late February.

The effective closure of the Strait of Hormuz has had far‑reaching consequences. Several countries, particularly in Asia, have begun rationing fuel. Notably, the US blockade has selectively allowed some shipments bound for China to pass, underlining the strategic nature of US policy.

A cordial US-China relationship
Despite well‑publicised tensions over semiconductors, rare earths and Taiwan, the US‑China relationship has remained more pragmatic than confrontational. A May meeting between Presidents Trump and Xi produced few concrete outcomes beyond an order for 200 Boeing aircraft, but the agreement to meet again in Washington in September signals that both sides see value in maintaining at least a superficially cordial relationship. Leaders from France, Germany and Canada have also visited Beijing, suggesting that “being friends with China” may be becoming acceptable again in Western capitals.

US reciprocal tariffs on China and others were ruled illegal by the US Supreme Court, an encouraging sign of judicial independence. However, it is likely that tariffs will be reinstated under alternative trade legislation. Tariffs themselves did not appear to be a major point of contention at the Trump‑Xi summit; the Middle East situation featured more prominently.

A rise in more extreme political parties
Political polarisation has intensified across several democracies. In the UK, the Reform Party’s strong performance in local elections has triggered a leadership challenge within the Labour Party. In Germany, the AfD has gained momentum and is well placed to win state elections in Saxony‑Anhalt later this year. In France, the right‑wing National Rally remains firmly ahead in polls ahead of the 2027 presidential election.

Against this backdrop, Hungary’s decision to vote out Viktor Orbán after 16 years in power and replace him with a more moderate leader is a rare counter‑trend, offering a tentative sign that electorates can move back towards the centre.

The UAE’s decision to exit OPEC is another important development. It underscores the fragility of the region and signals that, once the Strait of Hormuz reopens, the UAE is likely to increase oil production significantly above previous OPEC quotas, which should help ease oil price pressures over time.

An invested interest
The US government has continued to expand its direct role in strategic sectors such as technology and critical minerals. It has built sizeable stakes in companies including Intel, which has outperformed the broader US market year‑to‑date, while rare earth‑related assets have also been strong. On 21 May, President Trump announced that the Commerce Department will invest further in technology companies, with a particular focus on quantum computing.

This deepening state involvement in key industries is a clear expression of state capitalism. The market impact remains nuanced: government backing can be supportive for selected companies, but it also raises questions about capital allocation, political risk and long‑term competitiveness. This is an area warranting close attention.

Outlook for H2 2026
Our central view is that geopolitical intensity is close to a peak in H2 2026, but the path to de‑escalation is unlikely to be smooth. Progress in US‑Iran talks and credible reports that President Putin wishes to conclude the Ukraine conflict by year‑end point to a gradual reduction in headline risk. President Trump also has two strong domestic incentives to dial down tensions: the 250th anniversary of US independence on 4 July, which he will not want overshadowed by war, and the mid‑term elections later in the year, where a prolonged conflict could carry political costs for Republicans.

At the same time, the underlying geopolitical regime remains more fragmented and state‑driven than in the previous decade. The US is deepening its direct role in strategic sectors, reinforcing the trend towards state capitalism and industrial policy as key market drivers.

New alliances and shifting energy dynamics will also shape the landscape. The UAE’s decision to exit OPEC and its likely move to ramp up production once the Strait of Hormuz reopens underline both the fragility of the current energy setup and the potential for non‑OPEC producers to gain market share over time, which could help ease oil price pressures if conflicts de‑escalate.

Political polarisation is set to remain elevated across major democracies, with stronger showings by more extreme parties in the UK, Germany and France, even as Hungary’s shift towards a more moderate government offers a rare counter‑trend. This mix of high but potentially peaking geopolitical tension, rising state involvement in markets and a diverging electorate suggests that risk premia are unlikely to return quickly to pre‑2020 levels, even in a more benign conflict scenario.

Overall, we expect H2 2026 to bring some relief on acute geopolitical flashpoints, but within a structurally more interventionist and politically fragmented world. For investors, this argues for treating any de‑escalation‑driven rally as an opportunity to reassess exposures to state‑backed sectors, energy and politically sensitive markets rather than assuming a simple return to the old geopolitical normal.

Action for investors:

  • Target beneficiaries of state support, but stay valuation‑disciplined. Companies receiving direct US government investment in strategic sectors such as semiconductors, quantum computing and critical minerals can offer attractive upside where fundamentals and policy support align.
  • Treat fossil fuel exposure as tactical, not structural. Elevated geopolitical risk and supply constraints should keep fossil fuel assets supported in the near term, but the UAE’s exit from OPEC and its likely production ramp‑up once the Strait of Hormuz reopens argue against structurally increasing long‑term allocations at this stage.
  • Use any de‑escalation‑driven rally to reassess risk premia. If progress in US‑Iran talks and Ukraine peace efforts triggers a relief rally, we would use it to review exposures to energy‑sensitive assets, state‑backed sectors and politically fragile markets.
  • Be selective in politically polarised markets. Elevated support for more extreme parties in the UK, Germany and France increases policy and regulatory uncertainty. We would treat these markets as areas for active, bottom‑up stock selection rather than broad, passive exposure.
  • Maintain diversification across geopolitical blocs. The combination of a more pragmatic US‑China relationship and deepening US state capitalism argues for diversified exposure across regions and supply chains, avoiding over‑concentration in any single geopolitical bloc.

4. Geopolitics: New alliances, state capitalism and a diverging electorate

Continued rivalry between the US and China, the forging of new alliances, the growth of state capitalism, electorate dissatisfaction and bifurcation are the key geopolitical themes we see for 2026.

US-China rivalry
Rivalry between the US and China will remain a central issue in 2026. Washington’s push to ‘de-risk’ from Chinese supply chains will continue, particularly with respect to semiconductors and rare earth metals. In practical terms, however, the reality is that the US, China and other economies in Asia are deeply interdependent. Global supply chains are highly complex with many economies involved in the production of the hardware needed to drive the development of AI.

It is ironic that the push by the US to be more autonomous involves an embrace of Chinese-style state interference, with the US taking strategic stakes in key industries with a focus on IT and rare earth metals. In a parody of a phrase famously used by Chinese authorities, some have called this “capitalism with American characteristics”. In 2025 the US government acquired significant holdings in companies including Intel (chip making) and MP Materials (rare earth mining), as well as forcing Nvidia and AMD to hand over 15% of the revenues they receive from their chip sales to China, in exchange for export licences. And, of course, the US authorities have intervened to force a change in ownership of TikTok’s US operations to a US company.

Beijing, meanwhile, will continue to develop its own sphere of influence through closer trade links and infrastructure projects with nations perceived as friendly. This was evident during China’s 2025 Victory Day Parade, which saw leaders from a range of countries including Russia, Iran, North Korea, Indonesia, Belarus and Myanmar in attendance whilst there was a notable lack of representation from established Western nations.

This strategic decoupling will reshape and split the global economy, with countries tending to lean towards China or the US in terms of their economic loyalties. Nonetheless, it will be challenging for two countries that are so deeply entwined to decouple entirely or at speed. This suggests a reality in which a pragmatic, transactional arrangement between the world’s two great superpowers results.

“ This strategic decoupling will reshape and split the global economy, with countries tending to lean towards China or the US in terms of their economic loyalties. ”

New alliances
New alliances will be strengthened. The expansion of the BRICS is perhaps the clearest example of that as highlighted in last year’s Outlook. The four founding members (Brazil, Russia, India, and China) were joined by South Africa in 2010, Egypt, Ethiopia, Iran, and the UAE in 2024 and Indonesia in 2025. Trade links between the members can be expected to strengthen but it is certainly not a homogeneous grouping.

European security and the Russia–Ukraine war
Russia is facing economic, manpower and fiscal strains in its war with Ukraine. These could push it either toward negotiation or escalation. Europe itself is undergoing its largest rearmament in decades but cyberattacks as well as Russian drone, aircraft and shipping incursions into European NATO member territories are likely to continue to pose challenging threats. The cyberattack on British carmaker Jaguar Land Rover is a key example of this. The auto manufacturer was unable to produce cars for over a month and required government loan guarantees to support its supply chain. However, there are encouraging signs of European leaders coming together under the catalysing influence of President Trump.
 
Sanctions
Sanctions are set to continue, intensify and change in their nature. The US intends to impose higher tariffs or sanctions on countries that trade with Russia (especially those who import cheap Russian oil, as evidenced by increased tariffs on India) and encourage or pressure other countries to do likewise. Sanctions may well also, or alternatively, be on individual companies and their leaders rather than the countries themselves. While their effectiveness can be questioned, there is no doubt they can be harmful to the individuals involved, as they have been in the case of sanctioned Russian nationals.
 
Regional flashpoints and institutional strain
Multiple regional tensions remain. The experience of recent years is that these can flare up with little warning. US involvement has been successful in defusing many of these, a role which is ever more important as global institutions – such as the United Nations, World Trade Organization and International Monetary Fund – struggle to enforce norms and manage global challenges.

Trust and leadership
2026, we believe, will see a continued erosion in the trust that electorates have in their political leadership (Figure 5). A polarisation between increasingly far left and far right political options is evident in many countries, with the ‘middle ground’ often struggling. That tension is evident, for example, in France – with the result being a situation of virtual ungovernability. The electorate feel they are often choosing the ‘least bad’ option rather than a party or candidate they truly support. Too many leaders focus on reacting to crises without offering a coherent long-term direction.

Equally important is global awareness. Politicians who retreat into nationalistic policies and views ignore the reality of the deep interdependence in areas such as trade, technology and climate. A key watchpoint will be the US midterm elections which will be a test for Donald Trump as to whether his gamble on key policy initiatives such as tariffs and immigration have worked with the voting population. Recent political losses are a concern for the Trump administration and he may need to pivot to the domestic agenda.

Action for investors:

  • In 2026, geopolitics will be defined by US-China competition, concerns over new security threats, especially in Europe, technological rivalry and the response in the form of state capitalism. There will be no easy or quick solutions.
  • Populist policies that reflect either far left or far right views will lead to concerns as to the sustainability of those governments.
  • Maintaining portfolios that are adequately diversified between geographies continues to be important.

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