Throughout the Cold War, defense stocks were routinely good investments. Eastern Europe, the USSR, and China presented no investment opportunities. The US had virtually no trade or business relationships with its Cold War opponents. Today we are transitioning into a new Cold War in which Eastern Europe is part of NATO and the US has substantial investments in and trade relationships with China and, still to a degree, with Russia. Investing for a new Cold War with China and Russia when China is the dominant industrial power in the world presents challenges for the investor.
Isolation Will Not Work as a Cold War Strategy
The North won the American Civil war with the use of the Anaconda plan. Their navy blockaded the Southern states from the sea and controlled the Mississippi River while the army held the North. This choked off the South economically and deprived them of being able to export cotton and receive arms and industrial goods from Great Britain. The US and its allies used the same strategy of encirclement with the USSR, Eastern Europe, and China. It developed diplomatic and trade relationships with China in order to pry it away from dependence on Russia. In the end the USSR ran out of money trying to maintain its empire and keep up with the American “Star Wars” advanced missile program. This approach is not going to work today. During this Cold War the US will need to reestablish much of the industrial base that it gave away to China over the last 50 years while still maintaining the trade ties that make sense. This fact will govern much of where the profits will be for investing as relations between the US and China get colder and colder.
Who Sides With Whom in the New Cold War?
During the first Cold War China did not have much to offer the world in order to gain either allies or at least keep other countries from joining into alliances with the US. Today China has trade relationships with virtually every nation on earth and is the largest trade partner for many. It has been involved in constructions projects and acting as mediator for disputes such as with Iran and Saudi Arabia. Today pretty much nobody could cut off trade with China without a lot of pain. The same goes for Russia which is a huge supplier of oil, natural gas, fertilizers, and strategic minerals. Countries like Indonesia and India do not want to take sides in the war in Ukraine but rather buy Russian oil and natural gas at discounts and keep receiving Russian fertilizer and grain while Ukraine has difficulties shipping its own grain.
Stocks That Could Benefit from a New Cold War
As a new Cold War develops the US and its allies will work to become less reliant on China and Russia for raw materials and finished products. Specifically, strategic minerals including lithium, oil, natural gas, finished lithium batteries, advanced circuit boards, and both medical supplies and medicines. Expect to see cybersecurity become a major focus of the military and civilian sectors. As the US and its allies work to bring these products and services back onshore or at least out of China and Russia companies in the West that can pick up the slack will prosper.
Investments Based on a New Cold War Will Focus on Economic Independence
Yahoo Finance lists a number of specific investment opportunities including Qualys and similar IT security companies. Leidos Holdings offers security services more focused on the needs of the military. Livent Corporation makes chemicals and polymers used in conjunction with lithium batteries. Booz Allen Hamilton Holding Corporation is highly integrated into the military industrial complex providing engineering, digital solutions, management and technology consulting, analytics, and cybersecurity services. Albemarle Corporation develops and manufactures specialty chemicals worldwide. Its Lithium segment provides lithium compounds like lithium carbonate, lithium hydroxide, lithium chloride, and lithium specialties.
Raw Material and Industrial Investments for a New Cold War
Fortinet is another cybersecurity firm. Raytheon is an obvious choice as a major defense contractor. Caterpillar is a clear choice as the leading producer of construction and mining equipment, a wide range of engines and transmissions as well as specific vehicles for the US military. FreeportMacMoRan is an American company engaged in mining worldwide and an ideal choice things like lithium mining when the US pivots away from China and Russia as suppliers of strategic minerals. Palo Alto networks is one more cybersecurity firm that will benefit as the US beefs up its cyber systems.
One way to invest for a new Cold War could be to focus on the revamping of American infrastructure necessary to make the country more competitive again and strategically sound.
Investing for the New Cold War – SlideShare Version
Investing for the New Cold War – DOC