Bremmer: Europe Vulnerable; India Ready To Rise

July 29, 2014

Ian Bremmer is one of the foremost geopolitical analysts of our time. He is founder and president of Eurasia Group, a geopolitical risk and consulting firm based in New York. Bremmer has authored several books, including national best-sellers "The End of the Free Market: Who Wins the War Between States and Corporations" and "Every Nation for Itself: Winners and Losers in a G-Zero World." He is a global research professor at New York University. He is a frequent contributor to publications like Reuters, The New York Times and The Wall Street Journal, and is a regular on CNBC, Bloomberg TV, Fox News Channel and CNN.

Bremmer recently sat down with ETF.com to discuss the escalation in West-Russia tensions in the aftermath of the Malaysian Airlines missile strike. He gives us his take on Modi's and Jokowi's election wins in India and Indonesia, respectively. Bremmer also sheds light on which regions and countries are most sheltered from the current geopolitical tensions.

ETF.com: How will the missile strike on Malaysian Airlines MH-17 over separatist-held territory in Ukraine play out? Will it lead to a ceasefire, or a further escalation in West-Russia tensions?
Ian Bremmer: If it does lead to a ceasefire, it won't hold. You've seen that there are two more Ukrainian fighter jets that went down this morning [7/23/14]. Kiev is, of course, blaming the Russian government and saying the missiles came from Russia. The Russians are saying it came from the separatists. It shouldn't matter since, if the Russian separatists shot them down, those weapons were given to them by the Russians. A lot of the separatists came over from Russia. Nonetheless, it does matter, because it allows the West to more easily deny needing to get involved.

There's an enormous amount of criticism that's coming from the United States, the Europeans, Canadians and Australians, but there's not a lot of desire to really escalate, because everyone has come to the conclusion that escalating in a serious way is not going to accomplish anything. They're right.

What's astonishing about this entire thing is we just had a plane go down. Three hundred people dead, civilians—mostly Europeans—and it hasn't actually really changed anything on the ground. The Americans are still pushing towards Level 3 sanctions. They were doing that before. The Europeans are absolutely a little more supportive of the U.S., some of them at least—certainly the Brits and the Germans and absolutely the Dutch—but not the Italians, not the Spanish and not the French.

The Chinese, if anything, are closer to the Russians today than they were before the incident. You can see that with the Chinese state media reaction, which took the Russian propaganda at face value. They see some commercial utility in doing that. The Russians were on the defensive in the immediate aftermath of the plane being shot down. I think now they're right back on their previous strategy.

The Ukrainians are still saying, "These guys need to go. We're not any closer to getting the gas dispute resolved. We're not any closer to having the violence soften or ease in Ukraine." So no, it's probably hastened the timing of escalation of the crisis somewhat. We were going to get to this point anyway. Aside from that, it hasn't had much impact.

ETF.com: Do you see the EU rallying behind the U.S. to impose stricter sanctions on Russia?
Bremmer: This crisis will make the Europeans more likely to take a tougher line. But they will still be easily a couple steps back behind the Americans at all points, in part because even the toughest of the Europeans have much more exposure economically to the Russians than the Americans do. Secondly, the ability to coordinate foreign policy in Europe is incredibly difficult, and very slow and inefficient.

ETF.com: So you don't see this event causing any more damage to European economies than it would have before the incident?
Bremmer: We thought that the damage to the European economies was going to be severe. We were much more concerned about that than the folks on the street were, most of whom don't really pay attention to geopolitics. If anything, market consensus has now moved closer to our position. But again, this hasn't really actually changed that much.

In historical context, if there's anything that's surprising here, it's how little additional response there is, how little change, despite the fact that we've just seen a plane shot down—not intentionally, but nonetheless shot down, very clearly, by separatists on the ground in Southeast Ukraine, who have been supported consistently by Russia.

ETF.com: Switching to Gaza, how is Operation Protective Edge different from previous conflicts in Gaza?
Bremmer: It's different in the sense that Israel is in a better position in the short term, partially because the world is maximally distracted by a bunch of other crises. Regional actors are much more concerned about what is happening in Iraq and Syria than what's happening in Gaza—not only the war in Syria, but also the fragmentation of Iraq and the rise of the Islamic state. The Americans are more concerned about that—as well as an Iranian deal and Ukraine-Russia.

Furthermore, you now have a government in Egypt which is much more aligned with Israel than Mr. Morsi's Muslim Brotherhood government was. El-Sisi has basically destroyed the Muslim Brotherhood in Egypt. He considers Hamas a terrorist organization, so Hamas is not getting the kind of support they were before. Qatar has backed off a little bit because they have seen how ineffectual their support has been recently. They've also gotten some pushback from the Saudis.

So the ability of the Israelis, both to truly degrade Hamas's military capacity and not have it rebuilt anytime soon, as well as to push them in the context of very little economic leverage for the Hamas leadership, is actually pretty good timing. On the other hand, there's been a fair number of Israeli soldiers getting killed, obviously nothing close to the number of Palestinian civilians and children. But from the Israeli perspective, this is a more costly invasion than many Israelis would have expected. That has the potential to hurt Netanyahu's popularity.

The winner here, interestingly, is probably Mahmoud Abbas, who has been active as a statesman. Hamas is not going away, but Abbas' position in the Palestinian government will likely strengthen. That means his ability to go to the United Nations to join other international organizations in a unilateral way as a Palestinian state against the express wishes of the United States and Israel is likely to be greater.

Longer term, even though this defangs Hamas—and let's face it, the direct military threat of Hamas to Israel was pretty limited—it's certainly radically asymmetrical, compared to the direct military threat of Israel to Hamas. Longer term, the ability of the Palestinian state to be more effectual internationally, and also to gain sympathy and support, is probably going to thrive.

ETF.com: The Israeli stock market looks to be brushing off this current conflict. Do you have a view on Israel's economy?
Bremmer: I don't think there's going to be a significant issue here. Certainly, if the Americans were to maintain a flight restriction on Israel, that would have an effect on the markets. I was a little surprised by that. That's a more aggressive move from the FAA backed by Obama than we would have expected. But it looks like it's a short-term move. There has been some outcry in the U.S. among pro-Israel circles, most visually Mike Bloomberg getting on his personal plane and flying over to Tel Aviv in solidarity with the Israelis, much to Obama and Kerry's personal pique.

I don't expect that there is going to be much impact here, especially because the likelihood is that the actual links of any military incursions by the Israelis directly on the ground in Gaza will be short—a matter of weeks, not months.

ETF.com: Jokowi was just elected president of Indonesia. Is this positive for Indonesia's growth prospects? Does it change your view on the country's economy?
Bremmer: Not much. First of all, there are still legal challenges that are coming from Prabowo, who's sort of said that it was stolen, and massive voter manipulation, and phantom voters and that Jokowi was complicit, or his party was. We don't think that's going to move anywhere. But that'll still cause a little bit of market uncertainty in the near term.

My issue is not that Jokowi is a bad guy. He's actually quite popular, he's well spoken, he's not very flamboyant, and I think that's a good thing. He's considered a can-do guy, certainly during his Jakarta governorship. Indonesia has been on a pretty good trajectory under Susilo Bambang Yudhoyono (SBY). They've got great demographics. They've got a lot of natural resources.

They're benefiting from massive amounts of Chinese trade and investment that will continue. They can also pivot very easily between other economies as well, working well with the Japanese, well with the Americans, and all the rest. They're in a good position in that regard. That doesn't change.

Jokowi is less pro-market than a lot of people believe. When he was governor, he was more than willing to play populist on local subsidies. I suspect he'll do that nationally. Indonesia is a very decentralized government—hard for one person to win. Jokowi is not a dramatic change from his predecessor SBY, in the way that Modi in India, another decentralized state, is a dramatic change from his predecessors in the Congress party.

I would say India was really bad. Now it looks really good. Indonesia was pretty good, and now it's still pretty good. That's the way I would look at it.

ETF.com: Are there any other elections in the world you have your eye on, where a reformist leader—like Modi in India—might draw significant investor enthusiasm?
Bremmer: That would be the case in Brazil if Rousseff lost, but I don't think that's going to happen. So no, I think India is really the big upside election in the emerging markets this year. It's gone. He won in spectacular fashion. Not only does he have absolute majority in the Lower House, which hasn't happened in decades, but he personally is just such a hard worker. He's much more transparent, much more efficient. He's putting people like that around him. That's a really dramatic change.

ETF.com: So you have a favorable view on India at this time?
Bremmer: Definitely.

ETF.com: When you consider everything going on geopolitically, what's your biggest concern at the moment that can potentially derail global economic growth?
Bremmer: In the near term, it's absolutely Russia-Ukraine. Because if this crisis blows up and if the Ukrainians try to take the Russians out, and they have some success locally—again, the Ukrainians are calling these guys terrorists, they just knocked down a plane. I don't think they'll get American military support.

But nonetheless, if they feel emboldened, they get tougher sanctions—I think the Russians will then go after them formally. If that happens, you could see Europe get pushed back into recession. That's clearly the notion that we are moving towards much more aggressive sanctions, even if only incrementally against a country as powerful as Russia economically. That's absolutely the biggest danger out there.

ETF.com: Are there any regions or countries that are sheltered from any fallout from the current geopolitical tensions? Is there a safe-haven country?
Bremmer: The United States is relatively sheltered because all these things hit the Europeans more than America. Most of the Western Hemisphere is pretty sheltered. You look at Mexico, you look at Canada, you look at Brazil—where are the geopolitical effects that really hit them?

Of course, if the global economy falls, the global economy falls. But the geopolitical problems we're talking about are in Eurasia, they're in the Middle East, they're in Asia. They're really not in the Western Hemisphere. That makes the United States less interested in resolving them, of course. But it does also redound well to folks who are investing in this part of the world.

ETF.com INSIGHT

iShares MSCI Indonesia (EIDO | B-99)
Bremmer doesn't consider Jokowi's recent election win in Indonesia a drastic change from his predecessor, such as the case in Modi's win in India. Still, that's a good thing, according to Bremmer, who says Indonesia was already on a "pretty good trajectory" due to its great demographics, abundant natural resources and its trade relations with China, Japan and the US. For broad, representative exposure to Indonesian stocks, EIDO is a solid choice. For 61 basis points, the cap-weighted EIDO holds roughly 100 large-, mid- and small-cap Indonesian stocks traded in Jakarta. Its $550 million in assets makes EIDO the largest Indonesia-focused ETF and its $14 million in median daily volume makes it the most liquid option. Spreads, however, average 0.10%, so limit orders are still recommended.

iShares MSCI India ETF (INDA | C-94)
The Indian stock market has been ecstatic over the recent election of Indian Prime Minister Narendra Modi—a big vote of confidence from the investor community. While critics claim the enthusiasm is overblown, Bremmer disagrees and says Modi is "a dramatic change from his predecessors in the Congress party." Change isn't always good but Bremmer notes that "India was really bad, now it looks really good." Investors evaluating Indian equities might consider INDA which holds a representative basket of nearly 70 Indian companies and trades more than $9 million most days at an average spread just 2 pennies wide. INDA tracks its index well and has returned more than 25 percent over the past year—a hot fund to be sure.

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Methodology: ETF selections are made solely by ETF.com. They are neither selected by, nor are they investment recommendations from, Alpha Think Tank strategists. ETF selections are made by the ETF.com Analytics team based on the themes highlighted in each weekly interview with Alpha Think Tank strategists.

We implement a stop-loss of 10% from the ETF.com Pick Date, whereby any funds triggered by that stop will drop off the tracker. The tracker data is updated weekly and is subject to change, according to our ongoing interviews with our strategists.

Ticker Fund Name ETF.com Pick Date TR % (Since Pick Date) TR %
(1 Yr)
Closing Price $ (7/25/14) Inspired By
INDA iShares MSCI India 2/24/14 26.72 27.96 30.55 Roubini
EWW iShares MSCI Mexico Capped 3/3/14 19.60 7.00 70.93 Friedman
PXH PowerShares FTSE RAFI Emerging Markets 2/17/14 17.86 16.01 22.44 Arnott
GXC SPDR S&P China 2/3/14 17.68 20.19 80.77 Rogers
AMU ETRACS Alerian MLP ETN 1/27/14 16.96 20.06 32.90 Luskin
CCXE WisdomTree Commodity Country Equity 3/14/14 13.95 14.18 32.24 Schiff
GDX Market Vectors Gold Miners 3/31/14 13.62 -0.51 26.82 Merk
EWP iShares MSCI Spain Capped 1/27/14 13.34 40.54 42.18 Luskin
INDA iShares MSCI India 4/9/14 13.10 27.96 30.55 Kotok
MCHI iShares MSCI China 4/15/14 13.01 17.57 49.77 Faber
EWW iShares MSCI Mexico Capped 2/11/14 12.65 7.00 70.93 Fitzsimmons
DBB PowerShares DB Base Metals 5/8/14 12.25 7.98 17.87 Gartman
EWI iShares MSCI Italy Capped 1/27/14 10.45 32.31 16.97 Luskin
GMF SPDR S&P Emerging Asia Pacific 4/9/14 10.26 17.14 86.82 Kotok
IEMG iShares Core MSCI Emerging Markets 4/28/14 9.22 14.25 53.42 Luskin
NKY Maxis Nikkei 225 2/3/14 9.06 5.75 17.95 Rogers
EWY iShares MSCI South Korea Capped 2/24/14 8.43 18.20 65.31 Roubini
ELD WisdomTree Emerging Markets Local Debt 2/17/14 7.77 2.78 47.72 Arnott
EWJ iShares MSCI Japan 3/3/14 7.70 5.61 12.13 Friedman
BKF iShares MSCI BRIC 5/22/14 7.39 15.54 40.35 Arnott
EWP iShares MSCI Spain Capped 2/24/14 7.34 40.54 42.18 Roubini
EWH iShares MSCI Hong Kong 4/15/14 6.70 16.37 21.65 Faber
VTI Vanguard Total Stock Market 4/28/14 6.08 18.88 102.14 Luskin
EWP iShares MSCI Spain Capped 3/10/14 5.38 40.54 42.18 Dorsey
RSP Guggenheim S&P 500 Equal Weight 3/10/14 5.37 20.28 76.74 Dorsey
GULF WisdomTree Middle East Dividend 3/10/14 5.04 28.89 22.77 Dorsey
VNM Market Vectors Vietnam 4/15/14 4.99 20.18 21.77 Faber
FXA CurrencyShares Australian Dollar 3/14/14 4.77 3.29 94.07 Schiff
EWS iShares MSCI Singapore 5/5/14 4.61 8.16 14.04 Bremmer
BAB PowerShares Build America Bond 4/9/14 4.58 12.27 29.62 Kotok
DBJP db X-trackers MSCI Japan Hedged Equity 6/12/14 4.15 7.78 37.11 Roubini
CHIQ Global X China Consumer 3/17/14 3.93 5.82 14.80 Yardeni
IEMG iShares Core MSCI Emerging Markets 6/12/14 3.42 14.25 53.42 Roubini
EIDO iShares MSCI Indonesia 5/28/14 3.21 -1.51 28.89 Fitzsimmons
KOL Market Vectors Coal 5/8/14 2.75 7.15 19.03 Gartman
FXC CurrencyShares Canadian Dollar 3/14/14 2.70 -4.84 91.96 Schiff
AFK Market Vectors Africa 5/5/14 2.29 19.39 33.88 Bremmer
XLU Utilities Select SPDR 4/9/14 2.18 12.32 42.44 Kotok
TUR iShares MSCI Turkey 6/10/14 1.90 5.87 60.19 Friedman
EPOL iShares MSCI Poland Capped 3/3/14 1.75 12.07 29.09 Friedman
VTI Vanguard Total Stock Market 6/10/14 1.20 18.88 102.14 Friedman
ROBO Robo-Stox Global Robotics and Automation 3/3/14 1.19 N/A 27.28 Friedman
RSX Market Vectors Russia 2/3/14 0.90 -6.15 24.63 Rogers
MUB iShares National AMT-Free Muni Bond 7/16/14 0.56 8.67 109.07 Kotok
SCPB SPDR Barclays Short Term Corporate Bond 3/17/14 0.35 1.64 30.74 Yardeni
CHIQ Global X China Consumer 2/11/14 -0.07 5.82 14.80 Fitzsimmons
FXA CurrencyShares Australian Dollar 7/9/14 -0.12 3.29 94.07 Merk
USDU WisdomTree Bloomberg US Dollar Bullish 4/15/14 -0.28 N/A 24.73 Faber
VHT Vanguard Health Care 7/2/14 -0.80 23.41 112.90 Yardeni
FXB CurrencyShares British Pound Sterling 7/9/14 -1.07 9.93 166.99 Merk
DBC PowerShares DB Commodity Tracking 3/14/14 -1.31 -1.23 25.69 Schiff
VIS Vanguard Industrials 7/2/14 -1.38 20.45 103.21 Yardeni
DBGR db X-trackers MSCI Germany Hedged Equity 2/24/14 -1.39 13.39 25.41 Roubini
EWL iShares MSCI Switzerland 6/24/14 -1.51 15.43 33.84 Dorsey
DBC PowerShares DB Commodity Tracking 3/31/14 -1.65 -1.23 25.69 Merk
FXE CurrencyShares Euro 3/31/14 -2.60 0.71 132.50 Merk
ERUS iShares MSCI Russia Capped 5/22/14 -3.66 -8.40 18.93 Arnott
ITA iShares U.S. Aerospace & Defense 5/5/14 -3.91 20.57 105.38 Bremmer
EZU iShares MSCI EMU 6/12/14 -4.00 18.75 41.02 Roubini
IAU iShares Gold Trust 3/14/14 -5.45 -2.09 12.67 Schiff

Data as of 7/25/14

 

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