The American intervention in Venezuela brings spheres of influence back to the forefront of geopolitics

Just three days into the year, geopolitical events are back in the spotlight. Below, we analyze the immediate consequences of the US strike in Venezuela and outline our tactical views for the start of the year.

On January 3, the United States captured Venezuelan President Nicolás Maduro and his wife to bring them before US courts on drug trafficking and other charges. US President Donald Trump stated that the United States intended to “administer” Venezuela until a transition to a new government could take place. This action echoes the 1989 US intervention in Panama and the arrest of Manuel Noriega. The lack of resistance appears to indicate cooperation between Venezuelan authorities and US forces. This means that a pro-US transitional government will be installed, with US forces ensuring the security of critical infrastructure, including energy and maritime infrastructure, while a lengthy legal battle ensues over Maduro’s indictment. It remains to be seen whether Maduro’s supporters will oppose this intervention.

From Venezuela to the global geopolitical stage: realpolitik, Wild West style

These events will have significant repercussions for global geopolitics, as well as for the United States. Domestic political support for Republicans could erode, increasing the Democrats’ chances of victory in the November midterm elections. The intervention in Venezuela was not authorized by the US Congress. If the Democrats gain control of the House of Representatives, or even the Senate, in November, the second half of President Trump’s term will be marked by a more restrictive governance environment. While President Trump is expected to continue issuing executive orders, operations requiring congressional approval—such as budgetary procedures—are likely to become more complex.

With the United Nations having lost much of its influence as an arbiter, international relations will remain strained and will require intense diplomacy. The United States has reasserted its regional authority in Latin America. Mexico and Colombia have been warned by Mr. Trump about the role of cartels based in their territories in drug trafficking to the United States. For the region, which has turned to China as a trading partner, the message is equally clear. Indeed, Secretary of State Marco Rubio has stated that Cuban leaders “should be worried.” We interpret these recent developments as an application of the “Monroe Doctrine,” which posits that the Americas constitute an exclusive sphere of influence for the United States, or “our hemisphere,” to use Mr. Rubio’s words. Trade relations with China will need to be rebalanced to satisfy the United States, even as China is posting record levels of exports and the rest of the world seeks pragmatic solutions to Mr. Trump’s tariff policies. Brazil, whose relations are already strained with the Trump administration, is the most exposed country in Latin America.

International relations are entering a new era of realpolitik, where regional escalations can no longer be ruled out.

The repercussions of these events on the rest of the world should not be underestimated. China will seek to consolidate its sphere of influence in South Asia through shared infrastructure and trade links, while maintaining a balance with India. In the Middle East, Israel’s 2030 military plan anticipates a significant increase in activity, with implications for Iran, Lebanon, and Syria. This could trigger regional reactions. In Eastern Europe, Russia’s invasion of Ukraine aims to reshape the balance of power between NATO and Russia, while Mr. Trump’s desire to bring Greenland into the US sphere of influence could redefine the dynamics of US-European relations.

In other words, international relations are entering a new era of realpolitik, where regional escalations can no longer be ruled out.

Consequences for the markets

Given the modest size of the Venezuelan economy, recent events are not expected to affect the global economic outlook.

In the short term, more cyclical emerging market equities could experience temporary volatility. Chinese stocks could give up some of last year’s gains, while US equities are expected to remain stable. Our investment strategy is moderately risk-averse, with an underweight position in US equities and an overweight position in emerging market equities. We will reassess our regional equity exposures in light of the new risk balance. The medium-term outlook remains attractive in emerging markets. Many have strong fundamentals and are rich in commodities, a sector where demand will remain strong. The US and China are moving toward a reasonable compromise between their mutual interests. If the prospect of increased foreign direct investment in Venezuela stimulates growth in Latin America, emerging market assets should benefit.

We maintain our current 12-month target of USD 63 per barrel for Brent.

At the sector level, the Venezuelan energy industry is the most exposed. We are currently maintaining a neutral stance on the global energy sector, as we anticipate both upside and downside risks to oil prices in the short term. In the medium term, if US investments in the Venezuelan oil sector result in sustainably higher production, OPEC+ supply adjustments should prevent an excessive drop in oil prices. Oil trade flows are expected to reflect geopolitical blocs: Venezuelan crude will meet US needs and, via US companies, will be transported to Europe, while Russia will strengthen its energy ties with China. US intervention in Venezuela could also be motivated by a desire to encourage a decline in oil prices before the midterm elections: we are maintaining our current 12-month target of USD 63 per barrel for Brent crude.

The US dollar is likely to receive short-term support, as recent events have exacerbated the dollarization of the Venezuelan economy, which began with the introduction of the digital bolivar (VED) in 2021. The VED has depreciated sharply over the past 12 months, with limited access to the dollar accentuating the effective depreciation relative to the official rate and worsening the erosion of real incomes. Greater liquidity in the dollar market will likely accelerate the shift to the US currency and support demand. Moreover, with the United States planning to increase its investments in the country’s oil infrastructure development, dollar financing is likely to rise, both from US entities and domestic companies involved in the process. In the medium term, a decline in short-term policy rates should allow for a moderate pullback in the dollar, while the euro, the Japanese yen, and emerging market currencies should remain stronger.

In the medium term, a cut in short-term interest rates should allow for a moderate decline in the dollar.

In the bond market, we do not anticipate a sharp decline in yields across most developed markets. The 10-year US Treasury yield is expected to remain within a range of 4.0% to 4.5% as we approach the end-of-January deadline for Congress to pass the budget. With the breakeven inflation rate expected to remain stable around 2.0% to 2.2%, yields on 10-year US Treasury Inflation-Protected Securities (TIPS) could return to the 2.0% to 2.3% range. In the sovereign debt segment, we believe UK Gilt yields offer the best downside prospects. Corporate bonds offer only slightly lower spreads compared to government bonds, but we remain confident in the potential of emerging market bonds.

While emerging market equity indices are largely dominated by China, US dollar-denominated bond indices include a larger share of Latin American bonds. We anticipate a further tightening of emerging market spreads, as growth in these markets remains robust while short-term US yields continue to decline. In the near future, commodities are expected to perform well, with precious metals outperforming due to the rising geopolitical risk premium.