A Fragile Truce – Political, Economic and Market Extremes
Article by Beat Wittmann, Chief Investment Strategist at Key Family Partners SA
Meandering Between Nationalism and Democratic Capitalism
What links hidden Chinese youth unemployment and major property defaults to Russia’s capital controls and the crumbling Ruble and the IMF bridge loan to serial sovereign defaulter Argentina?
Two reasons – short-term capital markets and longer-term political and economic system adjustments.
In the short-term we expect weaker links in the global system increasingly under pressure, potentially any time triggering a sharp increase in volatility, liquidity mismatches, as well as sovereign and corporate casualties.
In the long run, it is a historic fact that democratic capitalism prevails over autocracy, nationalism and populism, clearly at an advantage to deliver personal freedom, economic progress and common prosperity in a sustainable way.
Geopolitics in the Eye of the Storm
The geopolitical, economic and capital market environment is heating up for the next phase of great power rivalry and competition.
Russia’s unlawful military attack on Ukraine and the post WW ll peace order as well as China’s unwise alignment with Russia, compounded by its failing economic policies rooted in prioritizing ideology over economic advancement will lead to major disruptions.
China – Pressing Changes
We are increasingly convinced that the hard working and success oriented Chinese population will object to their leader dishonoring the social contract of delivering common prosperity and economic progress. We are also starting to realize that China’s leader neither understands nor is willing to accept Deng Xiaoping’s credo of pragmatism as opposed to personal aggrandizement and nationalist ideology.
We expect China to remain on a fractious and slippery downward economic and capital market trajectory – unless the Chinese Communist Party (CCP) either forces the President change course or changes the President.
However, prolonged negative economic developments and corporate financial defaults in China could lead to painful ripples in the world economy, and European exports, in particular.
Supercharged Election Calendar 2023 and 2024 – Testing Times Ahead
Crucial national elections are ahead in the coming months. Slovakia, Switzerland, Netherlands, (possibly) Spain, Poland, Argentina and in 2024 Taiwan, Indonesia, Belarus, Russia, Belgium and USA. Even autocracies yearn for legitimization and popular support. Turkey’s autocratic ruler might best serve as a recent example.
The electoral battlefield is defined by the paradigm struggle between autocratic identity politics and democratic, free market and trade oriented economic politics. The polarization might sharpen within countries (Trump versus the rest in the US) and political ideologies (de-risking from China and de-coupling from Russia).
The Inevitable Normative Power of Economic Facts and Market Forces
Western capitalist democracies and autocracies alike are increasingly facing the normative forces of the economic realities and capital market prices.
The West, however, has clearly proven its superiority to reinvent itself and emerge stronger from crisis, not only in the political but also in the corporate sphere with businesses moving through Schumpeter -type creative destruction processes and innovation cycles.
Key for sustainable political, societal and economic success in any country or geographic region is legitimate and competent leadership and functioning and accountable institutions. This success is also based on addressing cultural identity grievances with pragmatic, inclusive and growth oriented reforms and competitive business policies.
Ultimately, economic facts and asset prices force sovereign and corporates alike to reform and emerge strengthened or double down on failed policies and risk misery and collapse. Recent examples are globally relevant and diverse. China’s property giants Evergrande and Country Garden risking defaults, collapsed Swiss lender Credit Suisse merged into UBS, Argentina’s debt re-negotiations with the IMF, Russia’s Ruble slump and capital flight and Turkey’s self-destructive monetary policy – to name the obvious.
Jackson Hole Economic Symposium – Economic and Inflation Trends Slowly Slowing
FED Chairman Jerome Powell will speak on August 25th at the Jackson Hole Economic Symposium. Since last year inflation rates have declined by two thirds towards the 2% target rate, and the US economy has remained steadfast with unemployment at record lows.
However, the path forward for policymakers on both sides of the Atlantic remains hazy and is fraught with risks. Monetary policy likely remains tight as leading central banks accept the risk of over-tightening to regain credibility and secure independence.
Meanwhile, the lagging effects of significantly higher interest rates are mercilessly working through the economic system and cause pain and casualties. Consequently, active asset allocation and a highly selective and analytically rigorous approach to investments and credits are key.
Rough Autumn Season Ahead – Focus on Safeguarding
Capital markets have recently started to bounce back from lower natural resource prices, low-level equity markets’ volatility and the US yield curve in record inversion.
Equities remain the asset class of choice. Selected equity markets and sectors, however, have already had a good run given the rather mediocre macroeconomic backdrop and the hazardous journey back to normalizing monetary and economic conditions.
We would recommend some defensive and seasonal shift from equities to attractively priced high grade government bonds and to cash, providing not only unprecedented high yield levels but ‘dry powder’ optionality to tap emerging special situation opportunities in H2 2023 and into 2024.