2024 – Success Through Adaptation
Article by Beat Wittmann, Chief Investment Strategist at Key Family Partners SA
Geopolitics – Muddling Through in 2024
In 2024, the world appears to be a dangerous, complex, volatile and unpredictable place. Our instincts tell us to look for black and white solutions, hence, nationalist autocrats and populists alike have been doing well by promising simple, yet, mainly fact free solutions for complicated problems.
In today’s environment, muddling-through in politics, business and strategy is not only a valid but also a historically tested, often applied and successful method. Key is to embrace an increasingly fragmented environment, a set of different or conflicting goals and the sensitivity towards the interests and views of various stakeholders.
According to Darwin’s ‘Origin of Species’, it is not the strongest who survive but the ones who best adapt to an ever changing environment given the fact that nobody can predict all consequences of any decision made – good or bad. Just think of what we are faced with today – multiple and simultaneous crises encompassing armed conflict, global trade frictions, climate change and pandemic.
US Elections – Partisanship, Polarization and Paralysis
The number one geopolitical event in 2024 will be the US presidential election. Geopolitics, economics and capital markets will follow.
In an ideal world, neither Biden nor Trump would be elected but rather a younger, bipartisan and pragmatic new president. Sadly, US domestic politics are characterized by extreme partisanship, polarization and as a result, paralysis.
However, at the same time the US globally reign supreme in economic and financial, technological and defense capacities and capabilities. We are convinced that the US capital markets continue to remain the most rewarding investment destination, even if its democratic rules and institutions are set to go through some rough times and severe testing.
Europe – The Pressure to Advance Open Strategic Autonomy
The EU will hold parliamentary elections in June 2024, that won’t lead to changes in political control but will serve as important indicator in regards to looming trends towards nationalism and populism threatening Europe’s cohesion in a polarizing and fragmenting world.
Europe needs to manifest its strategic autonomy necessary to strengthen the EU’s resilience and competitiveness in general and, in particular, in the face of security threats from Russia, autocratic superpowers such as China and a politically dysfunctional, less reliable US.
European defense policy and industry has been the origin and core of the ambition towards strategic autonomy. However, it is key to address a multitude of weak, yet mission critical areas including banking and capital market unions, health care, trade and supply chain management and energy transition.
In his 2020 speech, Josep Borrell, the EU’s High Representative for Foreign Affairs and Security Policy says it all: ‘If we do not act together now, we will become irrelevant, as many have forcefully argued. Strategic autonomy is, in this perspective, a process of political survival. In such a context, our traditional alliances remain essential. However, they will not be sufficient. As power differentials narrow, the world will become more transactional, and all powers, including Europe, will tend to be so.’
Europe can no longer afford to remain passive nor rely on US security, when confronted with a Russian military attack and threats regarding the European post WWll security order, especially, when US priorities are shifting and commitment to NATO unsure in light of a potential Trump re-election.
After decades of irresponsible neglect European NATO allies should spend a minimum 2% of GDP. Crucial is a common EU defense industry approach, focusing on cross-border consolidation in the highly fragmented European defense sector, securing joint research and development as well as advanced technology and manufacturing capacity with the goal to achieve much improved hard power projection and interoperability.
Global Economy – Normalizing Monetary and Credit Cycle
The global inflation and interest rate cycle has peaked in 2023 and is currently on a normalization trajectory favoring risk assets. However, the global economy, although supported by resilient US data yet facing weakness in Europe and China remains vulnerable as a result of delayed monetary easing, tightening fiscal policy and the highly uncertain geopolitical outlook.
We continue to believe that the FED and the ECB will rather over-tighten their monetary policy than changing course should inflation rise again. Just consider, the combination of global trade fragmentation, climate change and overdue, yet, much needed investments in critical infrastructure might lead to somewhat higher underlying inflation than in past decades.
Main risks to the global economic outlook include a spike in energy prices, and disruption in global trade and shipping route flows and supply chains, principally emanating from the militarily intractable Mid East situation.
Investment Outlook 2024 – Risk On
The WEF’s Global Risks Report 2024 is not very comforting and somewhat contradicting the more positive capital markets outlook, particularly, the recent highs in the US and, yes, in the German stock market.
In 2024 and beyond, we expect bonds and equities to beat cash, as a result of the positive inflation and interest rate movements as well as extraordinary opportunities in areas such as technology, namely artificial intelligence, energy transition or longevity including health and nutrition.
Active investment management and uncompromising selectivity will be essential. The lagging effects of the brutal rate hiking cycle will show high dispersion of risks and returns. Still avoid firms with weak leadership and bad capital structures and focus on undervalued and well positioned growth opportunities.