The situation in Afghanistan is quickly evolving. As the US Military works to ensure a safe evacuation for as many Americans and Western allies as they can, a stark reality is beginning to set in. The Taliban have taken over, and their rules are now reality for the approximately 40 million people of Afghanistan.
In addition to the tragic nature of the ongoing evacuation, the imposition of ultra-conservative Taliban views is obviously a concern. Western values are likely to be repressed, including the freedoms of expression, religion, and the media, as well as liberal, social progress on women’s rights among others. These events are problematic in a variety of ways both today and tomorrow.
Dealing with the moral and political consequences of the Afghani government collapse is the most pressing concern. But as investors, we must also ask what the potential market consequences may be, if any. In today’s post, we’ll explore those questions and lay out a few potential risks worth monitoring.
Minimal Direct Impact
We do not believe the situation in Afghanistan is yet having any impact on global financial markets, nor is it likely to. Although it is approximately as large as California by population—the largest US state—Afghanistan has remained a very minor player on the global macroeconomic scene. The country is still an agrarian-based economy, and while it has vast mining resources, they remain largely untapped.
The US evacuation has created a bit of a void that other adversarial countries, such as China or Russia, can step into. Perhaps they can leverage that void and extend into other areas of the world, or maybe they can better tap those natural resources. Many empires have tried, few have succeeded.
Large market impacts aside, this is another indicator that geopolitical tensions are rising. This has been a trend for some number of years now, and the Afghanistan crisis shows the growing instability in the current geopolitical world order. Although some factions of the Democratic party appear adamant in their desire to cut military spending, we find it increasingly unlikely that meaningful cuts will occur.
Military spend will likely be a key negotiation point in the budgetary talks, regardless of how the events unfold from here. One of the justifications for the withdrawal is the enormous amount of money the US has spent in the country, by some estimates over $1 trillion over 20 years, that has not led to much in the way of tangible results. Despite the potential for reduced expenditures in Afghanistan, we do not expect the US to dramatically reduce military costs broadly.
Geopolitical Implications
The most direct geopolitical impact would be on refugee migration. Thousands, if not millions, of marginalized Afghanis may flee for greener pastures, and their most likely path will be toward Europe. We have seen immigration spark major political turmoil in the EU before—see Syria over the last decade—and a sudden mass influx of migrants may heighten tensions again.
From a more theoretical perspective, the suddenness and chaotic nature of the events, as well as the poor communication with key Western allies, has cost the US a degree of credibility around the world, particularly as an idealistic defender against anti-democratic autocracies. Although this statement seems obvious to say, it is hard to pin down any direct, practical market implications in the near term.
One possible risk to watch would be regarding Taiwan. Should China interpret these events as sign that America’s support of international allies is wavering, they may feel emboldened to forcefully bring Taiwan back into their orbit. This is not something we expect, but considering how crucial Taiwan is to global semiconductor supply, turmoil across the strait would become a major, highly significant market issue.
Domestic Knock-Off Effects
Another less direct implication is the potential this issue may have on the Biden Administration. The Biden Presidency has lost some amount of political capital, the question is how much?
Right now, we believe the impact is marginal at best, and we do not yet see any implications on the trajectory of US fiscal policy. The bipartisan infrastructure bill appears on track, and the Democratic party is continuing to push forward on a major, party-only-via-reconciliation spending package. Biden’s domestic agenda seems intact for the time being, despite his drop in approval ratings. This, as well as potential impacts on next year’s midterm elections, are key issues to watch.
Lastly, there are some esoteric arguments that can be made regarding the dollar. The US dollar has been and continues to be the world’s premier reserve currency. This privileged status has been driven, in part, by the perceived stability and hegemony of the US, its monetary system, and its legal institutions. While our view is that the Afghanistan collapse likely has little- to no-impact on the dollar’s reserve currency status, these types of crises should be closely watched for unforeseen knock-off effects.
As an investment manager, we remain focused on exploring all potential risks and opportunities in global financial markets, as well as on the intersection of current events and business. We do not believe the collapse of the Afghanistan government is a significant market event, but we intend to continue monitoring events for potential downstream implications should they arise.
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Sources: BBC and Worldometer.
This material contains the opinions of Manning & Napier Advisors, LLC, which are subject to change based on evolving market and economic conditions. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy, or investment product. The reader should not assume that investments in the securities identified and discussed were or will be profitable.
