Some random thoughts

 West Asia crisis

In June 2026, the US and Iran signed an agreement to extend their ceasefire by 60 days. This gave both sides time to negotiate a lasting solution to a long conflict. Most West Asian countries seemed to support this process. But Israel, the most important player in the region, kept its distance and did not fully sign on to the terms.

This week, Iran held the funeral of Ayatollah Ali Khamenei, its Supreme Leader, who was killed in joint US-Israel air strikes in February 2026. Leaders from several countries attended the long-delayed funeral, and millions of Iranians came out on the streets of Tehran to mourn him. His son, Mojtaba Khamenei, has since taken over as Iran's new Supreme Leader.

Even as the funeral was underway, the fragile ceasefire came apart. In the past two days, Iran attacked commercial ships passing through the Strait of Hormuz. The US responded on 7 July with what it called “powerful strikes,” hitting more than 80 targets inside Iran, and reimposed the oil sanctions it had lifted as part of the ceasefire deal. Iran, in turn, said it would deliver a “crushing response” and struck US bases in Kuwait and Bahrain on 8 July. On the same day, speaking at the NATO summit in Ankara, President Trump said he now considers the ceasefire “over” and a “waste of time.” Oil prices jumped sharply on the news.

Looking at the mood of the Iranian people, the stance of Iran's leadership on its right to enrich uranium and control the Strait of Hormuz, and Israel's position on Iran's rights, it seems to me that this conflict is far from over. This week's exchange of fire, coming barely three weeks after the ceasefire was signed, confirms that hoping for a lasting solution within the 60-day window was always more wishful thinking than realistic expectation.

A more likely path over the next couple of years could involve four things. First, Iran may push ahead with building a nuclear deterrent against Israel and prepare to avenge the killing of its former Supreme Leader. Second, GCC countries may continue to keep an equal distance from Iran, Israel and the US, even as some of them, like Kuwait and Bahrain, get drawn into the crossfire. Third, Israel may keep trying to weaken Iran's ability to strike it. And fourth, the US may keep swinging between war and peace, as it has done again this week.

Ethanol blending

The government's policy of blending ethanol with petrol has drawn sharp criticism from citizens. There have been complaints of vehicle damage and lower mileage due to blended fuel. Several environmental groups have also opposed the E20 policy, saying it uses too much water to produce ethanol.

The government has strongly defended the E20 policy, pointing to its environmental, agricultural and economic benefits. Automobile companies have also said that E20 fuel does not damage modern, compatible vehicles. A review of thousands of service records suggests there is no widespread evidence of engine damage, wear and tear, or corrosion caused by E20 fuel.

Even so, opposition parties and civil society groups have turned E20 into a popular campaign against the government. They allege that the blending policy mainly benefits the family of a minister who is in the ethanol production business.

This could well become a major election issue. It is not clear how the government will restore public trust in blended fuel and put this controversy to rest. If I were asked for a suggestion, I would say the government should make blended fuel optional rather than mandatory, and offer incentives such as a lower price for blended fuel or a subsidy on insurance premiums.

Infra construction quality

Poor quality of infrastructure, especially roads, along with allegations of large-scale corruption in awarding and executing key infrastructure projects, has become a common topic on social media.

While corruption cannot be ruled out, a more likely reason for the poor condition of newly built roads is rushed construction to meet deadlines, which are often set for political reasons. Poor design and inadequate safety audits are also major concerns for road quality in India.

Whatever the reason, the fact remains that India spends much more than the global average to build its highways, yet the quality of these highways remains poor in terms of design, durability and comfort.

It would help to open up infrastructure construction to global competition and make it mandatory for all projects above Rs 50 million to be awarded through global tenders.

It would also be worthwhile to set up a dedicated highway police force to ensure the safety and security of highway travelers and to quickly address complaints of damage and accidents.

 

After the ceasefire: Why the uncertainty does not end here

Markets appear relieved. The US and Iran have reached an understanding to pause the hostilities that escalated earlier this year, and negotiations for a formal peace treaty are expected to unfold over the next two months. The financial world is, for the moment, pricing in stability.

I would encourage caution. As I argued in an earlier post (Exercise Caution in the Peace Trade), the probability is high that markets have already priced in the bulk of the peace dividend. What lies ahead is not a clear road to recovery but a landscape with multiple overlapping sources of tension — geopolitical, structural, and domestic. Investors would do well to incorporate these into their thinking.

This post is not a forecast. It is a map of the risks I think are being underweighted.

The MAGA domestic pivot

A ceasefire in West Asia does not suit every political narrative. For the Trump administration, the outcome of a conflict in which Iran appears to have extracted meaningful concessions — sanctions relief, asset releases, recognition of Strait of Hormuz leverage — may not sit comfortably with the Make America Great Again agenda. With US mid-term elections approaching, the political incentive to redirect attention is strong.

The most plausible redirections include a reignition of the tariff war, confrontation with NATO allies who did not participate in the Iran campaign, or attempts to exercise influence over Cuba and other near-hemisphere targets. Any of these would reintroduce uncertainty into financial markets.

A stronger Iran and a fragile West Asia

If early reports are accurate, Iran emerges from this episode with economic sanctions lifted and frozen assets released. More importantly, the conflict demonstrated to the world the latent leverage embedded in Iranian control over the Strait of Hormuz — leverage that Iran will not be inclined to relinquish quietly. How Tehran deploys this newfound strategic confidence will be critical to watch.

The two paths are clear. Iran pursues a Persian-imperial vision — enhancing support to Houthis, Hezbollah, Hamas and allied proxy networks — or it pivots toward economic pragmatism and regional co-existence. History suggests the former is more likely in the near term, even if the latter is in Iran's long-run interest. A rising Turkey, increasingly positioning itself as an alternative patron for these groups, complicates matters further.

On Israel, I will simply note what the June post observed: a meaningful and lasting peace requires structural change that goes well beyond a ceasefire. The depth of grievance on multiple sides — accumulated over decades and sharpened by recent events — means that conflict in the region will remain a background condition for years, not months.

Japan: The guilt fades, the ambition stirs

In November 2023, I wrote about the world shedding the guilt of the two world wars and gradually reverting to the competitive, nationalist norms that characterized the pre-1945 era. Japan is, in my view, one of the more significant expressions of this trend. There are faint but discernible signals that Japan — which carried the burden of WW2 guilt for eight decades — is beginning to reassert a martial identity. Shinzo Abe's assassination in 2022 accelerated political shifts in that direction; subsequent defence budget expansions and the revision of Article 9 constraints have continued that trajectory.

If Japan's strategic ambition continues to harden, the Indo-Pacific becomes a materially more volatile neighborhood. For India, which is simultaneously managing Chinese pressure on its northern and maritime borders, this is not an abstract geopolitical observation — it has direct implications for defence budgets, alliance posture, and the cost of maintaining strategic autonomy.

India's unfinished preparations

Near home, China continues to expand its presence in the seas around India, arming and supplying neighbours including Pakistan and Bangladesh. South Asia is unlikely to be a quiet region regardless of what happens in West Asia.

And India's own preparations for a more contested world remain incomplete. Energy security is a work in progress. Our external balances are heavily dependent on services exports and remittances from the West — both structurally exposed to disruption. We rely materially on China for critical chemicals, minerals, and APIs that underpin our pharmaceutical and electronics export industries. Defence indigenization, while underway and accelerating, is a decade or more away from delivering genuine self-reliance.

None of this is to be pessimistic about India's long-run prospects. It is to be clear-eyed about the gap between where we are and where we need to be.

What this means for investors

The short conclusion is this: a secular bull market in Indian equities is not around the corner. The macro environment will stay complex, headlines will remain stress-inducing, and the temptation to make large directional bets on peace, normalization, or a global risk-on cycle should be resisted.

That said, decent wealth compounding opportunities are always present, even in difficult markets. They are just not at the index level. The more productive approach is to focus on specific businesses with growth and earnings visibility that is not dependent on a benign macro outcome.

Volatility will stay elevated and stress inducing. Brace for it, and invest accordingly. 

The war and beyond

For the past 17 days, a significant and highly intense conflict has unfolded in the Middle East. This war is multifaceted, encompassing military strikes, counterattacks, intricate narratives, and propaganda from all sides. The aggressors in this war are the United States of America (U.S.) and the State of Israel, while the defender is the Islamic Republic of Iran. While the U.S. is a secular state, under President Donald Trump, there have been calls to promote a stronger Christian identity. Israel, as a Jewish state, and Iran, an Islamic state, have starkly different ideologies but share a long history of religious and political conflicts rooted in their common Abrahamic heritage.

The relationship between Israel, the U.S., and Iran has been contentious for decades. A key event in this ongoing tension was the 2025 military confrontation between Israel and Iran. On June 13, 2025, Israel bombed Iran’s military and nuclear sites, killing several military officers, scientists, and civilians. After 12 days of intense fighting, the U.S. mediated a ceasefire.

However, the current conflict cannot be reduced to religious differences, counter-terrorism, or self-defense. Instead, it appears to be part of a broader U.S. strategy to:

·         Control the global energy market and key trade routes,

·         Maintain geopolitical and economic supremacy over Russia and China, and

·         Prevent the rise of autonomous economic powers in the Middle East.

With Iraq’s military power decimated and Pakistan’s strategic assets severely weakened during Operation Sindoor, Iran remains the only truly independent and potent military power in the region. The ongoing Russia-Ukraine conflict has also highlighted Western Europe’s energy vulnerabilities, further underscoring the importance of controlling energy resources and strategic trade routes such as the Suez Canal, the Strait of Hormuz, and China’s Belt and Road Initiative (BRI). Achieving this would give the U.S. a decisive edge in global geopolitics.

Despite the theoretical strength of this strategy, its implementation has not been without complications. The first major setback came when coalition forces killed Iran’s Supreme Leader, Ayatollah Khamenei, on the first day of the conflict. This act, combined with the bombing of a school that killed 160 young girls, has galvanized Iran’s resolve and transformed the war into a religious struggle. The death of Khamenei has united the Iranian people under the banner of Islamic radicalism, while also making Arab support for the U.S.-Israel coalition increasingly uncertain. Meanwhile, the attack on the school has severely damaged international opinion, particularly in Europe, where anti-coalition sentiments are rising. Even President Trump faces mounting criticism domestically. Most NATO allies have so far refused to join the war despite repeated calls by President Trump.

The Current State of Affairs

As of now, the war shows no signs of de-escalating soon. While the intensity of attacks may subside as military resources dwindle, the broader conflict appears far from resolution. Additionally, several key trends are emerging:

·         Global Economic Crisis: The war threatens to spark a global economic crisis, driven by energy inflation and severe logistical bottlenecks reminiscent of the economic disruptions seen during the Covid-19 pandemic.

·         Middle Eastern Impact: Countries like Qatar, Bahrain, UAE, Kuwait, and Iraq, caught in the crossfire, are witnessing widespread infrastructure damage and suffering reputational harm as secure havens.

·         Israel’s Vulnerability: Israel, long considered militarily invincible, has reportedly sustained significant losses to both its infrastructure and military forces, leading to a reassessment of its invulnerability.

·         U.S. Economic and Security Costs: The U.S. has sustained considerable losses, both in terms of military assets and economic costs. The long-term implications could be far-reaching, with the U.S. facing higher security risks for years to come, as Islamic radical groups seek to avenge Khamenei’s death.

·         Iran’s Dilemma: Iran has lost many key leaders, faced substantial infrastructure damage, and alienated long-time allies like India and Pakistan. Meanwhile, the Iranian prince in exile has called for a popular uprising in Iran, hoping to restore his regime.

·         Russia and China’s Restraint: Surprisingly, both Russia and China have refrained from directly entering the conflict on Iran’s side, although there are reports suggesting they may be providing covert support through ammunition and technology.

Potential Endgames: How Will the Conflict End?

Admittedly, I do not possess even basic qualifications to forecast the outcome of this war. Nonetheless, like any aware citizen, I find it relevant to stay aware of the current situation and make an assessment of the likely outcomes based on my understanding of the various contemporary issues and readings.

In general, wars can end in four main ways:

1.    Aggressor Victory: The aggressor achieves its objectives, replaces the existing regime with a puppet government, and extracts reparations from the defeated enemy. A historical example would be the U.S. victory in Iraq.

2.    Defender Victory: The defender manages to repel the aggressor’s forces, captures or kills key military leaders, and emerges with a strengthened position. Examples include World War II and the 1971 Indo-Pakistani War.

3.    Truce: Both sides agree to a ceasefire, with the aggressor retreating and both parties finding a negotiated resolution. An example of this would be Operation Sindoor.

4.    Stalemate: Neither side wins, but the fighting continues at low intensity, with no formal end to the conflict. The Russia-Ukraine conflict serves as an example.

U.S.-Israel Alliance Victory (Aggressor Wins)

A U.S.-Israel victory could lead to the following outcomes:

·         Regime Change in Iran: Iran’s Islamic regime is overthrown, and a new, U.S.-friendly government is installed.

·         Enhanced U.S. Control over Arab States: The U.S. solidifies its influence in the region, ensuring strategic dominance over vital energy resources and trade routes.

·         Expansion of Israel’s Borders: Israel may continue its aggressive policies in Palestine, potentially annexing more territory and solidifying its position as a regional superpower.

·         Strengthened Economic Sanctions on Russia: With enhanced energy security in Europe, the U.S. could ramp up its sanctions on Russia.

·         Shift in U.S.-China Relations: The U.S. could gain an advantage over China, particularly in the economic and trade spheres.

·         Stabilized Energy Markets: As the conflict subsides, energy prices may stabilize, albeit at a higher baseline.

Iranian Victory (Defender Wins)

An Iranian victory could result in:

·         Revenge for Khamenei’s Death: Iran avenges the death of its leader by targeting top figures in Israel and the U.S.

·         Iran’s Rise as a Regional Power: Iran assumes a dominant role in the Middle East, uniting other Islamic nations and taking control of energy resources and trade routes.

·         Peace with Palestine: Israel may be forced to negotiate with Palestine, leading to a resolution of the longstanding conflict.

·         Empowered Radical Groups: Groups like Hamas, Hezbollah, and the Houthis could gain territorial control in key areas such as Palestine, Lebanon, Yemen, and Syria, destabilizing the region further.

·         U.S. Withdrawal from Iraq: The U.S. could lose its influence in Iraq and be forced to pull its military out of the region.

·         China’s Rising Influence: China may step in as the new protector of the region, offering military and economic support to rebuild Iran and other conflict-ravaged nations.

·         Surging Energy Prices: Iran’s control over energy routes could send oil prices skyrocketing, triggering a global economic crisis.

·         Ukraine yields to Russia’s demands: The NATO funding of Ukraine defense comes under pressure. Ukraine is forced to strike a deal and yielding control of some territories to Russia.

Truce (Mutually Agreed Ceasefire)

A truce could result in:

Restoration of the Status Quo: The parties agree to a ceasefire, and the conflict ends without significant territorial changes.

Continued Tensions: While fighting ceases, the underlying tensions remain high, and the region faces ongoing risks of further conflicts.

Shift in U.S. Influence: U.S. influence in the region may diminish, while Israel faces increased diplomatic isolation.

Regional Reconstruction: Reconstruction efforts in Israel, the UAE, Bahrain, Qatar, Iran, and other affected countries would begin.

Stabilized, Yet Elevated, Energy Prices: Although energy prices may stabilize, they will likely remain elevated due to increased security risks.

Stalemate (Low-Intensity Conflict)

A stalemate would lead to:

Continued Uncertainty: The conflict would drag on at a low intensity, with no clear victor.

Weakened U.S. Alliances: U.S. allies in the Middle East may begin to distance themselves from Washington, seeking their own political and economic strategies.

U.S.-Russia Diplomacy: With the conflict unresolved, the U.S. could seek a diplomatic resolution with Russia, easing tensions in other areas.

Pressure on NATO: The U.S. and NATO’s support for Ukraine may dwindle, leading to concessions with Russia over disputed territories.

While it is impossible to predict the exact outcome of this war with certainty, the evolving situation requires close monitoring. This war could potentially be the most defining moment in post-WW2 history.

I encourage readers to share their predictions and continue to stay informed.

 

Tomorrow: Where does India stand in this conflict

 

Markets Hold Firm Amid Global Unrest: Signal or Setup?

The Indian stock market has once again demonstrated its remarkable ability to weather turbulent times. Despite significant geopolitical headwinds, including the Indo-Pak tensions in April 2025 and the escalating Iran-Israel conflict in June 2025, the benchmark Nifty 50 has shown resilience, recouping losses swiftly and even posting gains. Month-to-date (MTD) in June 2025, the Nifty 50 has its ground firmly , despite threatening news flow, a weakening rupee, and surging oil prices. Trading volumes on the National Stock Exchange (NSE) have surged, even as foreign portfolio investors (FPIs) are only marginal net buyers and promoter entities offloaded over ₹400 billion in shares. Meanwhile, domestic institutional investors (DIIs) have though accelerated their buying and providing support to the market.

One may argue that this tendency to quickly overcome geopolitical shocks isn’t new. Over the past five years, the Nifty 50 and Sensex have delivered annualized returns of 10-12%, navigating challenges like the COVID-19 pandemic, global inflation, and geopolitical tensions.

Notwithstanding, this resilience raises two important questions: (1) Has the market fully priced in the short- to medium-term impacts of these geopolitical and economic challenges? And (2) IS the current investors positioning aligned with this collective wisdom, or are they holding back, waiting for clearer signals?

1.    Has the market fully priced in the short to medium-term impact of the current geopolitical and economic conditions?

The market’s muted reaction to rising oil prices and geopolitical escalation suggests that participants may indeed be looking past the immediate risks. Historically, sustained oil prices above $90/barrel tend to spook emerging markets, especially net importers like India. Yet, the INR and benchmark yields have only weakened modestly, indicating a lack of panic among both equity and debt investors.

There is also precedent for such behavior. During the Russia-Ukraine conflict in early 2022, the Nifty corrected nearly 10% in a month before stabilizing as investors shifted focus to earnings resilience and strong domestic demand. A similar pattern appears to be playing out in 2025, as the market leans on India's improving macro fundamentals: GST collections remain robust (₹1.72 lakh crore in May), credit growth continues to trend above 16%, and manufacturing PMI remains in expansion territory.

It is worth noting that the USDINR has depreciated less than 1% MTD, driven by risk-averse sentiment and dollar demand from oil importers. Crude oil prices, a critical factor for India (which imports over 80% of its crude), spiked over 10% to $76-77 per barrel following the Iran-Israel escalation, raising concerns about inflation and the current account deficit. However, retail inflation remains at a six-year low of 2.82% in May 2025, bolstered by a favorable monsoon and RBI’s recent rate cut, providing a cushion against these pressures.

Overall, the market seems to be assigning a lower probability to these conflicts escalating into scenarios that could derail India’s domestic growth story. The base case appears to be a temporary disruption with limited spillover effects—at least economically.

A prolonged Middle East conflict could disrupt oil supplies through the Strait of Hormuz, pushing Brent crude to $120 per barrel, which would strain India’s fiscal balance and reignite inflation. Similarly, sustained FPI outflows, driven by high valuations or cheaper Asian markets like China, could cap upside. Still, the market’s ability to hold above key support levels (24,700 for Nifty) and the absence of strong selling pressure suggest that investors are comfortable with current price levels for now.

2.    Are market participants aligned with this view—or are they still waiting for more evidence?

Positioning data tells a mixed story. While domestic institutions (mutual funds, insurance companies) have stepped up their buying—net purchases exceeding ₹600 billion in June so far—retail flows have plateaued. Systematic Investment Plans (SIPs) remain steady (₹20,900 crore in May), but net retail participation has softened somewhat in the derivatives and midcap space.

Moreover, futures & options positioning shows high open interest in index puts, suggesting that institutional players continue to hedge downside risks. Volatility, as measured by the India VIX, has edged up slightly (hovering around 14), indicating guarded optimism rather than outright bullishness.

Promoter selling—over ₹400 billion MTD—further complicates the narrative. While such activity isn’t uncommon ahead of Q2 fundraising or capital reallocation plans, it typically reflects either a valuation comfort zone or a strategic liquidity need. Given that this selling has not dented broader sentiment significantly, one could argue that other market participants are either confident in the underlying fundamentals—or are simply waiting for further clarity before making directional bets.

What does this mean going forward?

The current market resilience could very well be the product of a differentiated outlook: that India’s domestic story is strong enough to weather external shocks. But caution is clearly visible in the way participants are positioned—through hedges, elevated cash levels among HNIs, and selective buying rather than indiscriminate accumulation.

Until there is clarity on crude oil’s trajectory, the rupee’s stability, and the potential policy response from global central banks (especially the Fed’s July meeting), markets are likely to stay range-bound with a mild upward bias. Earnings upgrades in auto, banking, and infra sectors offer a supportive backdrop, but investors will want confirmation via Q1FY26 numbers before going all-in.

Conclusion

The collective wisdom of the market seems to have largely priced in current risks, but positioning suggests that investors are not fully aligned with this outlook—yet. Resilience, yes. Conviction, not quite. A ‘better than expected’ 1QFY26 performance could enhance conviction and pull the fence sitters in.

Israel-Iran Conflict: Implications for India’s Economy and Markets

The Middle East is once again a tinderbox, with the escalating Israel-Iran conflict threatening to spiral into a broader global crisis. Unlike the recent Indo-Pak hostilities, which remained contained, this clash carries the potential to draw in multiple nations, disrupting global trade and energy markets. For India, which is heavily reliant on energy imports, the stakes are high. While India has reiterated its neutral stance, the ripple effects of a prolonged conflict could significantly impact its energy security, inflation, current account balance, INR exchange rate, fiscal stability, and overall economic growth prospects.

This global flashpoint could have local consequences

The Israel-Iran conflict differs starkly from localized India and Pakistan military engagements. With China and Pakistan openly backing Iran, and Russia potentially supplying critical defense equipment should the U.S. directly support Israel, the geopolitical fault lines are deepening.

For India, this presents both risks and opportunities. The alignment of China, Pakistan, and potentially Russia with Iran could provide India an opening to mend recent strains in its ties with the U.S. and Europe. Strengthened diplomatic and economic alignment with the West could bolster India’s strategic position, particularly in securing foreign direct investment (FDI) and defense collaborations.

However, the immediate concern for India lies in its energy security. The Middle East accounts for a significant portion of India’s oil and gas imports. A protracted conflict could disrupt supply chains, spike global oil prices, and inflate India’s oil import bill. This would exert upward pressure on inflation, widen the current account deficit, and weaken the INR, potentially forcing the government to stretch its fiscal resources to stabilize the economy. While India is unlikely to be directly or indirectly involved in the conflict, the economic fallout could still be substantial if the situation escalates.

Uncertainty prevails

Despite these risks, there’s reason to believe the conflict may not spiral out of control. Cooler heads may prevail, leading to a ceasefire to avert a wider war. If this scenario unfolds, the impact on India’s economy and markets is likely to remain limited. Indian enterprises with economic interests in both Iran and Israel—spanning sectors like technology, agriculture, and energy—may face temporary disruptions, but the broader market impact could be contained.

However, should the conflict intensify and Western forces enter the fray, the consequences could be far-reaching. Disruptions in global trade routes, particularly through the Strait of Hormuz, could choke energy supplies, sending shockwaves through India’s economy. Such a scenario would test India’s policy framework, with missteps potentially jeopardizing long-term energy security, FDI inflows, and employment opportunities in the Middle East, where millions of Indian expatriate work.

What Investors should do?

For Indian investors and traders, the heightened volatility in global markets presents both temptation and peril. Navigating such uncertainty requires specialized skills that most retail investors lack. Attempting to capitalize on market swings driven by geopolitical developments is a high-risk game best left to professionals. The prudent course is to stay on the sidelines, closely monitor developments, and avoid impulsive decisions.

India’s policymakers, too, must tread carefully. A balanced approach that safeguards energy security, preserves economic ties with both Iran and Israel, and capitalizes on potential geopolitical alignments will be critical. Any miscalculation could undermine India’s long-term economic interests, particularly in a region as vital as the Middle East.

The road ahead

As the Israel-Iran conflict unfolds, India finds itself in a delicate position. While direct involvement is unlikely, the economic and geopolitical ramifications demand close watch. For now, the hope is that diplomacy prevails and a broader conflict is averted, minimizing disruptions. However, investors and policymakers alike must remain cautious, prioritizing stability over speculative risk-taking. In these uncertain times, watching from the fringes may be the wisest strategy.

“Trade” over “War”

After the recent geopolitical escalation between India and Pakistan, the president of the United States (POTUS), Donald J. Trump, has become one of the most hated personalities amongst Indian households. His babbling about facilitating a truce between two neighbors, offering trade deals as incentive, may not have gone well with most Indians; even though the Indian government has officially denied any role of the POTUS and his administration in negotiation with Pakistan. This is perhaps one of the reasons the market discourse has mostly ignored “the strategic economic partnership” signed between U.S. President Donald Trump and Saudi Arabia’s Crown Prince Mohammed bin Salman, last week.

In my view, this renewed strength in the Arab-US relations is very significant, not only for the US economy, but also for a much wider global economic context. Although, it might be speculative on my part, nonetheless I believe that this “strategic economic partnership” deal could potentially result in—

(a)   a material reduction in global geopolitical conflicts and yielding some peace dividend to the global economy;

(b)   strengthening of the USD, reinforcing its position as the primary global reserve currency;

(c)   additional demand for the US treasuries, arresting the yields;

(d)   sustainable reduction in energy inflation, affording good reasons to the US Fed for embarking on a sustained easing path;

(e)   normalization of global trade, especially aiding the growth in export-oriented economies like China;

The US-Arab strategic economic partnership

Last week, the U.S. and Saudi Arabia signed a strategic economic partnership that includes a range of deals. The agreement aims at boosting bilateral economic ties. The white house claimed that the deal entails a total investment commitment of $600 billion by Saudi Arabia into the US, encompassing investments in defense, energy, technology, arts, and zoology. Notably, some sources have claimed that the actual new commitments may be closer to $283 billion, since the US$600bn number includes some projects predating the latest agreement.

The deal reflects Saudi Arabia’s interest in diversifying its economy and the U.S. goal of securing foreign investment. A significant part of the agreement is a $142 billion arms deal, including sales of military equipment to Saudi Arabia, strengthening its defense capabilities and U.S.-Saudi security ties.

The stated part of the deal is significant. However, various sources are alluding to the unstated part, which could be transformative. For example,

(i)    The BoFA Securities strategist believes that this deal implies that the US is abandoning the original plan to boost its oil production to 3mbpd (from the current 1.7mbpd), as it is influencing OPEC+ “to boost oil output in return for lifting Russia sanctions, military support for OPEC nations (Iran deal a further catalyst)”.

(ii)   As per Reuters, Trump has relaxed requirements for Saudi Arabia to normalize relations with Israel as a condition for U.S. support in developing a peaceful nuclear program, signaling a shift in U.S. foreign policy priorities. This could pressurize Israel to stop hostilities against Palestine, ending one of the most brutal conflicts in recent years and paving the way for reconstruction of Gaza and other Palestinian territories.

(iii)  Lifting economic and other sanctions on Syria simultaneously with signing this deal, corroborates this shift. Given Trump’s focus on n U.S. economic and strategic interests, it could be reasonably speculated that lifting of Russian sanctions is on the table, as it aligns with these goals, especially securing energy supply chains for the European Union, and preventing the UE, Russia and Arabs from becoming too close to China. Resumption of US-Russia trade could also open new possibilities of a durable ceasefire between Russia and Ukraine.

(iv)  Saudi Arabia agreeing to retail petrodollar (pricing its crude in USD terms) implies a consistent demand for the USD, and flows into the US treasuries. This could halt the process of de-dollarization, if not completely reverse it.

To sum up, the latest US-Arab deal removes much uncertainty and adds some hope of a peace dividend accruing to the global economy in the next couple of years. Trump promoting “Trade” over “War” is definitely a good sign for the financial markets in particular.

India is reportedly at an advanced stage of trade negotiation with the Trump administration. Hopefully, this deal would be a balanced one and shall remove the uncertainty hanging over the markets for a couple of months.

2023: The year that was

2023 was a watershed year in many respects. The global economy, politics, geopolitics, climate, and technology witnessed some material changes that would have critical long-term impacts on human life.

Global economy

The global economy resumed the process of normalization after two years of disruptions caused by the pandemic and the Ukraine war. Supply chains were mostly restored. Fiscal and monetary stimulus unleashed to mitigate the impact of Covid-19 started to wind up. The prices of most commodities that had witnessed a sharp surge in the previous couple of years retraced back to their pre-covid trajectories. The interest rate cycle, which witnessed one of the sharpest hikes in policy rates in decades to rein the runaway inflation, also appears to have peaked.

The developed economies have been mostly successful in avoiding a meaningful recession, despite material monetary tightening, higher rates, and fiscal restraints. Most notably, Japan, which has been struggling with deflationary pressures for over a decade, managed to return to the path of growth with moderate inflation.

The overall economic growth is moderate as two of the primary engines of global growth the US and China stuttered. Germany and Sweden flirted with recession for most of the year, while the UK, France, and other European countries barely grew. In Latin America, Brazil managed to grow its economy by 3%, Argentina, and Chile were in recession, and other economies barely grew. The leading commodity-producing economies in Middle East Asia, Africa, and the Pacific (Australia) were either stagnant or contracted.

Geopolitics and politics

The Ukraine war in 2022 opened multiple fault lines in global geopolitics. The post-Cold War thaw in US-Russia relations evaporated completely. The US-Sino trade conflict that started to worsen in 2017 transformed into a major geopolitical standpoint. In 2023, the conditions seem to have worsened materially.

The latest episode of hostilities in the Gaza Strip has further widened the abyss. There were some indications of the Arab world mending its way with Israel. However, the Hamas attack on Israel in October changed everything. Middle East Asia is now a major flashpoint for a wider escalation of the conflict as groups of larger forces have pledged support to Israel and Palestine. The regrouping of Arabs with Russia and China alliance against the interest of the Western world is a clear pointer to the potential shape global order may be taking in the next couple of decades.

Hyper-nationalist right-aligned leaders/parties won elections in Italy, Argentina, and the Netherlands; while hardline leftists won elections (re-elections) in many jurisdictions, e.g., Germany, France, Australia, Chile, Mexico, Bolivia, Brazil, Peru, Honduras, and Columbia, etc. Both the Chinese Premier Xi Jinping and Russian Premier Vladimir Putin are firmly entrenched in their respective offices for as long as they wish, and actively working to polarize the world.

The commodity-producing and most populated emerging economies which felt that they had been at the mercy of the financialized Western world due to the overwhelming dominance of USD on global trade, regrouped (expansion of BRICS) to be in a position to command terms of trade.

Climate change

As the emerging economies and the developed economies made some progress in finalizing a workable deal to set effective emission targets at COP28 (Dubai), the weather conditions in the world worsened materially. Countries across the world witnessed dramatic changes in weather patterns, affecting crops, livestock, and human life. The global temperature continued to rise as many countries in Europe, North America, and Latin America witnessed episodes of extreme heat, rain, and snow. Floods were seen in many countries. The incidences of earthquakes, cloudbursts, cyclones, etc. also increased in many countries.

Technology

Artificial intelligence and blockchain technologies entered the mainstream in 2023. Cryptocurrencies and digital currencies gained much wider acceptance both as a store of value and a medium of exchange. Generative artificial intelligence entered the common man’s sphere, impacting the lives of households. Significant advances were made in the fields of biotechnology, green energy, astronomy, and space science.

Some of the key events of 2023 could be listed as follows:

·         Croatia adopts the euro and joins the Schengen Area, becoming the 20th member state of the Eurozone and the 27th member of the Schengen Area.

·         A deadly cold snap in Afghanistan kills 166 people and nearly 80,000 livestock.

·         A massive earthquake strikes southern and central Turkey and northern and western Syria causing widespread damage and at more than 59,000 fatalities and 121,000 injured.

·         The European Parliament approves a ban on the sale of new petrol and diesel vehicles in the European Union from 2035.

·         Lawmakers in the Russian State Duma vote to withdraw Russia from 21 conventions of the Council of Europe.

·         Vladimir Putin announces that Russia is suspending its participation in New START, a nuclear arms reduction treaty with the US.

·         The 2023 Chinese presidential election is held with the National People's Congress unanimously re-electing Xi Jinping as the President of the People's Republic of China to an unprecedented third term.

·         Iran and Saudi Arabia agree to resume diplomatic relations which were severed in 2016, at talks mediated by China.

·         OpenAI launches GPT-4, a large language model for ChatGPT, which can respond to images and can process up to 25,000 words.

·         Brazil and China sign an agreement to trade in their own currencies, ceasing the usage of the United States dollar as an intermediary.

·         San Francisco-based First Republic Bank fails and is auctioned off by the US FDIC to JPMorgan Chase for $10.7 billion. The collapse surpasses March's collapse of Silicon Valley Bank to become the second largest in US history.

·         Russia and Belarus sign an agreement in Minsk allowing the stationing of Russian tactical nuclear weapons on Belarusian territory.

·         Indian oil refiners started payments for Russian oil imports in Chinese yuan as an alternative to the US dollar due to increasing sanctions against Russia.

·         The world's oceans reach a new record high temperature of 20.96 °C (69.73 °F), exceeding the previous record in 2016. July is also the hottest month on record for globally averaged surface air temperatures by a considerable margin (0.3 °C (32.5 °F).

·         The global average temperature temporarily exceeds 2°C above the pre-industrial average for the first time in recorded history.

·         At the COP28 climate summit in Dubai, a consensus is reached for countries to "transition away" from fossil fuels, the first such agreement in the conference's 30-year history

·         India's Chandrayaan-3 becomes the first spacecraft to land near the south pole of the Moon.

·         The European Central Bank (ECB) raises eurozone interest rates to an all-time high of 4%, amid ongoing inflationary pressures across the continent.

·         Hamas launches an incursion into southern Israel from the Gaza Strip, prompting a military response from the Israel Defense Forces. Israel launched numerous air strikes on Lebanon after rockets are fired by Hezbollah and further attempts are made to penetrate Israel.

·         A series of earthquakes occur in Herat Province in Afghanistan, killing over 1,000 people and injuring nearly 2,000, with tremors felt in Iran and Turkmenistan. The earthquakes are the deadliest in the country since 1998.

·         The first AI Safety Summit takes place in the United Kingdom, with 28 countries signing a "world first agreement" on how to manage the riskiest forms of artificial intelligence.