Preserve and Perform – Active Management is King

  |   Business, Geopolitics, Macro, Market View

Article by Beat Wittmann, Chief Investment Strategist at Key Family Partners SA

Preserve and Perform – Active Management is King

Great prosperity and fortunes can be created (and lost) – just remember the transformative 1930s, 1970s and 1990s!

Geopolitics – Politics Trump Economics and Business

Ever since Russia’s unlawful military invasion of sovereign Ukraine, economic globalization as we know it and the peace dividend after the end of the Cold War in 1989 are over for good.

This is a clear message that in global affairs, politics and security are now taking precedent over economics and business – marking the dawn of a new era. The ‘Realpolitik’ consequences of this paradigm shift is the Global West decoupling from Russia and de-risking from China.

The big difference between economic midget Russia and economic giant China is that one is suffering from phantom pains and unrealistic imperial ambitions and the other increasingly claiming global relevance and, hopefully, thriving to assume geopolitical responsibility within the existing multilateral framework laid down by the likes of the UN and WTO charters.

There is unwavering determination on the part of the Global West led by the US, the Europeans and NATO to restore Ukraine’s territorial integrity ‘whatever it takes’ and to hold aggressor Russia accountable.

It is highly unfortunate China, as well as other big powers such as India and Brazil, are still fundamentally misjudging the principled zero tolerance in Europe for any military aggression to move sovereign borders by force in unilateral violation of international laws.

Macro Pressures on European and US Banks – Disorderly Market Risks

Sadly, Europe continues to suffer from self-inflicted fragmentation and structural deficiencies in European banking and capital markets. The blame for this pitiful and economically expensive state of affairs neither goes to European policymakers in Brussels nor the ECB in Frankfurt. Guardians of national champions, vested interests as well as lobby groups in the respective national capitals, particularly Berlin and Paris are to blamed.

US banks and capital markets have been more efficient in capital allocation, more profitable for its stakeholders and more rewarding for investors. Growing in absolute and relative importance is largely thanks due to the sheer size of the US domestic market, being regulated by common rules and the USD being the world’s dominating trade and reserve currency.

The backdrop of tightening credit conditions, liquidity mismatches and the lagging effects of significantly higher interest rates are leading to vulnerabilities in the corporate, property and consumer sectors and cause disorderly capital markets risks.

European Budget Challenges and Fiscal Reform Opportunities

A decade of cheap money is over. Clearly European countries including Germany are facing a very challenging fiscal environment and related financing obstacles. The post 1989 Cold War peace dividend is spent and the peace is over.

In almost all European countries, successive governments have wasted that peace dividend over the past three decades in social spending, subsidies and consumption instead of investing in productive capital.

Governments are now facing the lamentable situation of having to finance the energy transition, the rehabilitation of defense capacities and investment in public transportation infrastructure – just to name the most pending.

Unprecedented sovereign debt levels, aging populations and pressures on public budgets – three dimensions to a sustainable solution:

  • Engage in structural and market-oriented reforms to facilitate growth and increase productivity by attracting investment, businesses and qualified immigration

  • Cut economically harmful subsidies and reduce social spending

  • Increase indirect taxes on consumption and tax negative externalities on society like pollution and sugar, tobacco and alcohol consumption etc.

US Dollar Remains Dominant and EUR shows Potential

We would not expect the US Dollar to be replaced as the world’s premier trading and reserve currency in any foreseeable future. The EUR is an unparalleled success story and should be complemented with the creation of a full capital market union. Whenever Brussels had to face financial crisis – be it because of sovereign debt emergencies/Greece or COVID pandemic/NextGenerationEU – there was responsible and bold action guided by institutional progress.

A true European capital market union would create a massive pool of liquid assets, efficient capital allocation and attractive Eurozone sovereign fixed income instruments to raise capital for investment purposes.

The lack of a capital market union has prevented the EUR from progressing as a global trade and reserve currency and keeps its role massively below potential.

European Investment Outlook – Resilience in Adversity

Doomsayers on Europe, on Germany in particular, got it wrong again. Respective economies and markets have proven resilient facing adversity. So far in 2023, German and French stock markets have been global top performers in absolute and relative terms.

Clearly, the political, security, economic, business and investment road ahead to a new global multipolar equilibrium will be fractious and hazardous. Policymakers and businesses alike need to keep an open mind to manage through a prolonged phase of strenuous renewal.

European Opportunities in Private Markets and Infrastructure

2023 will be a year of extraordinarily attractive opportunities to enter European private markets investments in particular. It is interesting to follow the substantial and widening discounts to net asset values.

European countries finally must invest in overdue infrastructure projects (transportation, education, defense, alternative energy) open up to qualified immigration and support the transfer of selected political power from national capitals to Brussels or Frankfurt, particularly, in the areas of banking, finance, energy, and aerospace&defense.

Global Equity Markets – Active Management is King

The focus in global equity markets should be on financially strong, well managed multinationals with leading product and services propositions. They tend to gain market shares in downturns.

Stay away from companies across the board that profited from cheap money for too long, failing to build a sustainable and profitable business.

In an environment of ever-shifting geoeconomics, active investment management with total return oriented asset allocation and security selection is king.