Global Economic Leaders Pursue Transactional Deals Amidst Geopolitical Shifts

The transactional Davos and the Strategic Imperative for Canada

This conversation from Bloomberg Surveillance reveals a Davos transformed, shifting from broad dialogue to intensely transactional, deal-making sessions driven by a new global order. The non-obvious implication is that this transactional nature, while creating immediate opportunities, necessitates a fundamental strategic recalibration for nations like Canada. The hidden consequence is the potential for over-reliance on short-term bargains at the expense of long-term, sustainable economic relationships. This analysis is crucial for business leaders and policymakers who must navigate a world where geopolitical shifts directly impact trade, investment, and national economic security. Understanding these dynamics offers a distinct advantage in identifying and securing future growth opportunities by anticipating the strategic priorities of both governments and corporations.

The Grand Bargain: Defense Spending as a Lever for Investment

The current Davos, as observed by David McKay, President and CEO of the Royal Bank of Canada, is characterized by an unprecedented level of "transactional" dialogue. This isn't about abstract discussions, but about concrete "grand bargain" negotiations between business and government leaders. A key dynamic emerging is the use of increased defense spending as a catalyst for attracting manufacturing and investment. Canada, for instance, is looking at an $80 billion defense spend and actively seeking partners to leverage this for automotive and energy sector manufacturing. This represents a significant shift from traditional economic stimulus, where national security investments are now explicitly tied to broader industrial policy and economic diversification. The immediate benefit is the potential for job creation and technological advancement, but the downstream effect is the creation of a defense-industrial complex that could, over time, reshape trade dependencies and national priorities.

"There's been a lot of dialogue already in the first kind of 48 hours a lot of joint business government leader dialogue around investment to your point looking at making deals looking at co investment every country looking at diversifying trade bringing business leaders with them to talk about co investment or rather it's manufacturing investment defense spend in Europe and Canada's going up."

-- David McKay

The conventional wisdom of simply attracting foreign direct investment is being augmented by a more strategic approach: using government spending in critical sectors like defense to pull in private capital and manufacturing capabilities. This is a long-term play, where the initial investment in defense infrastructure is intended to yield dividends in industrial capacity and technological self-sufficiency years down the line. For countries like Canada, which have historically relied heavily on trade with the United States, this diversification strategy is not just about economic growth but about resilience in an increasingly fragmented global landscape. The risk, however, is that an overemphasis on defense-related industries might crowd out investment in other vital sectors, or that the geopolitical alignments driving these defense deals could shift, leaving nations with stranded assets or outdated industrial bases.

USMCA: A Foundation of Affordability in a Shifting Trade Landscape

Despite broader geopolitical tensions and a Canadian push for trade diversification, David McKay expresses confidence in the core of the USMCA agreement. His argument for its continued relevance is rooted in a fundamental economic reality: Canada's role in U.S. affordability. By producing goods in Canadian dollars and selling them to the U.S. at a discount--whether automotive parts, steel, aluminum, or food products like canola--Canada helps keep prices down for American consumers. McKay posits that any attempt by the U.S. to "bring all of that back" would be inherently inflationary.

"Canada really helps America with affordability. We make things in Canadian dollars, we sell it to the U.S. at a you know the U.S. buys it at that at 30 discount whether it's automotive parts whether it's steel aluminum food and a lot of our canola goes to the United States and therefore we help keep prices down in the US and if the US were to bring all of that back it's inflationary you'd shorten labor in the United States."

-- David McKay

This perspective highlights a critical, often overlooked, consequence of international trade: its impact on domestic inflation and consumer purchasing power. The immediate benefit of this trade dynamic is clear: lower prices for U.S. consumers and a stable market for Canadian exports. However, the longer-term implication is that this reliance on affordability as the primary trade lever could become a vulnerability. If U.S. policy priorities shift towards reshoring for reasons beyond pure cost-efficiency--such as national security or political expediency--the economic rationale for the current USMCA structure could be challenged. McKay’s comfort stems from the belief that the core of the agreement is beneficial for America, suggesting that pragmatic economic interests will ultimately prevail over more protectionist impulses. This, however, assumes a consistent policy environment, which is increasingly uncertain in the current global climate.

The Arctic Imperative: Defending Economic and Physical Security

Senator Thom Tillis touches upon a less discussed, yet strategically vital, aspect of national security and economic policy: the Arctic. He emphasizes that Canada must increasingly defend itself and invest in its physical and economic security, particularly in the Arctic region. This isn't just about military presence but about "dual-use investments"--those that serve both military and commercial purposes. This dual-use strategy is a powerful example of consequence mapping, where a defense investment is strategically designed to yield broader economic benefits.

"We have to increasingly defend ourselves and our not just our economic security it's our physical security we have to defend the arctic and we have to invest in the arctic and it's a big part of the commitment we've made to nato and we've made to the united states that you'll see a greater investment from canada we have to have dual use investments not just military but commercial and economic investments in the arctic and canada should play a role in doing that."

-- David McKay

The conventional approach might see Arctic investment solely through a security lens. However, McKay's framing suggests a more integrated strategy. The immediate payoff is enhanced national security and a stronger NATO alliance. The downstream, longer-term advantage lies in developing commercial and economic opportunities in a region that is becoming increasingly accessible and strategically important. This requires significant upfront investment with delayed payoffs, a strategy that conventional wisdom often shies away from due to the lack of immediate returns. By focusing on dual-use infrastructure, Canada aims to build a resilient economic base in the Arctic, creating a competitive advantage for the future by investing in an area that others may overlook or deem too costly to develop. The risk here is that such long-term, capital-intensive projects can be susceptible to shifting political priorities or global economic downturns, potentially leaving investments vulnerable.

Embracing the IPO Pipeline: AI and the Future of Public Markets

Ted Pick, Chairman and CEO of Morgan Stanley, offers a compelling analysis of the burgeoning IPO pipeline, particularly in the context of AI. He notes that while many companies have been hesitant to go public due to market volatility and rate uncertainty, the current environment is ripe for a resurgence. The key insight is that companies with significant market capitalizations are now considering IPOs not just for liquidity but to fund substantial investments in AI and productivity gains, something smaller firms struggle to afford.

"The stakes are really high this this round because as you say these the implied market caps of these companies are enormous but also they are paradoxically they're very large but also mega growers they have you know some of them have a little bit of a change the world feel to them so they could become must own."

-- Ted Pick

The immediate benefit for these companies is access to capital. The downstream effect, however, is the potential to reshape the equity market itself. If companies like SpaceX or OpenAI go public, they could become "must-own" assets, drawing significant investment from the active management community and potentially altering the concentration of the market, which has become dominated by a few large tech names. This creates a competitive advantage for investment banks like Morgan Stanley, which are positioned to underwrite these mega-IPOs. The conventional wisdom might focus on the risks of such large, growth-oriented companies going public, but Pick's analysis emphasizes the strategic necessity for these firms to tap public markets to fund transformative AI initiatives. The delayed payoff is not just for the companies but for investors who gain access to potentially world-changing technologies at their IPO, a strategy that requires patience but promises significant rewards.

Navigating Policy Uncertainty: The Dissonance Between Business Enthusiasm and Political Rhetoric

Pick also highlights a significant dissonance: the palpable enthusiasm among business leaders for deals and economic activity in the U.S. versus the often uncertain and sometimes negative rhetoric from policymakers. He describes this as a "dissonance" where business leaders see opportunities, while political discourse can signal "sell America." This gap is critical because it introduces unpredictability into the market.

"There's sort of a dissonance right now when you talk to business leaders about how much enthusiasm there is for deals and for energy in the U.S. economy and then when you hear the policymakers you hear uncertainty and you hear sell America how do you square those two narratives at a time where you do hear a growing number of investors say they are diversifying away from U.S. assets."

-- Ted Pick

The immediate effect of this policy uncertainty is a chilling effect on investment. Businesses may hesitate to commit capital when the regulatory or political landscape is perceived as unstable. The consequence mapping here is crucial: a perception of policy risk, even if not immediately borne out by concrete actions, can lead to capital flight and slower economic growth. Pick counters this by pointing to strong corporate and consumer health, robust capital markets, and a potentially accommodative Federal Reserve as powerful counterweights. The delayed payoff for businesses that can navigate this uncertainty and invest strategically lies in securing market share and competitive advantage when others are hesitant. The conventional wisdom might be to wait for policy clarity, but Pick suggests that the underlying economic fundamentals in the U.S. remain strong, offering opportunities for those willing to look beyond the immediate political noise.

Key Action Items

• Immediate Action (Next Quarter):

  • For Canadian Businesses: Actively explore partnerships and co-investment opportunities arising from increased defense spending in Canada and allied nations. Identify specific sectors (automotive, energy, technology) where defense procurement can drive new manufacturing contracts.
  • For U.S. Businesses: Analyze the affordability dynamic of Canadian imports. Understand how potential shifts in USMCA could impact your supply chain costs and competitiveness.
  • For Investment Banks: Prepare for a potential surge in tech and AI-related IPOs by strengthening relationships with pre-IPO companies and refining underwriting processes for mega-cap offerings.
  • For Policymakers: Focus on clear, consistent communication regarding economic policy to reduce the "dissonance" between business enthusiasm and political signals, thereby mitigating perceived country risk.

• Longer-Term Investments (6-18 Months):

  • For Canadian Businesses: Invest in dual-use technologies and infrastructure, particularly in the Arctic, to capitalize on both security and commercial opportunities. This requires patience, as payoffs are delayed.
  • For All Businesses: Develop strategies to integrate AI into operations not just for efficiency but to fund future transformative growth, acknowledging that this requires significant upfront investment and a long-term vision.
  • For Investors: Diversify portfolios to include emerging "must-own" mega-cap IPO candidates, understanding that initial investment may require holding through periods of volatility for long-term gains.
  • For Governments: Foster an environment that supports long-term strategic investments by providing stable policy frameworks, particularly in areas like defense and critical infrastructure, where immediate economic returns may be less apparent but future resilience is paramount.
  • For Canadian Companies: Review and potentially expand engagement in markets beyond the U.S., such as the Middle East, to build a more globally connected banking and corporate presence, aligning with Canada's broader diversification strategy.