Changes in Geopolitics, Economies and Capital Markets – First Slowly, Then All At Once

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

Commonalities between Ukraine, Credit Suisse and Nvidia

What do Russia’s military invasion, the collapse of Credit Suisse and Nvidia’s artificial intelligence boom have in common? They all share a slow development at the beginning, then an accelerated trend and, ultimately, a catalyst event leading to interstate war, bank failure or even a huge corporate success.

In the past decade we have gone through both extraordinarily transformative and disruptive times, marked by the Global Financial Crisis in 2007-2008, COVID 2020-2023 and Russia’s invasion of Ukraine in 2022. Along came unprecedented unknowns and risks – as well as opportunities.

Winners and Losers – A Widening Gap

The winning countries, companies, entrepreneurs and investors have been and will continue to be the ones who innovate and adapt. The losers, on the other hand, are the ones resisting change, while remaining complacent and stuck in anti-competitive and protectionist practices, typically living from past fortunes, myths and glories.

We owe today’s living standards to progress, freedom, a capitalistic system, private sector entrepreneurship and world trade. That was only possible, however, due to constitutional checks and balances, separation of power, and democratically legitimated state intervention as well as regulation and supervision to secure a competitive level playing field and inclusive economic growth and social mobility.

Geopolitics – Self-absorbed US, Europe and China

In the course of 2024 the global superpowers – the US, EU and China – will be progressively self-absorbed be it because of elections or economic reasons. This will not bode well for the two globally relevant wars in Ukraine and Gaza as well as various proxy conflicts in locations across Latin America, Africa, MidEast and Asia.

However, we continue to believe that armed conflicts will not escalate to the point that they affect global economies and markets in relevant ways, such as via sharply higher oil prices or severely disrupted global trade.

News, Noise and Nonsense of the US Election Circus

The US primaries have confirmed that the two old white men have entered the race – well known dramas, agendas and focus on domestic politics and economics will ensue.

On the positive side, however, the US economy is cyclically resilient and structurally strengthened by the capital expenditure programs of the infrastructure, chips and inflation reduction acts. Strategically most important is the US lead in global finance, advanced technology and aerospace & defense manufacturing – all this while having achieved self-reliance in energy.

The avalanche of news, noise and nonsense related to the US elections has little impact on the fundamental strength of the US economy. We continue to believe that the outcome of the presidential election will have little impact on the economy and capital markets.

Europe – Urgent Rehabilitation, Reforms and Recovery

Europe faces major challenges on multiple fronts, currently dealing with a bitter cocktail of political polarization, economic transformation and the break of the European post WW ll peace order after the invasion of Ukraine. It was a brutal wake up call – no doubt. Free, democratic and economically stable Europe will rise to the occasion, no doubt as well. Russia might win battles but stands no chance to win the war.

The decisive challenge for Europe, however, is to mobilize the political
will to meet the security threats and economic challenges with a necessary sense of urgency to overcome fragmentation and implement a coordinated response of adequate policy measures.

The toxic combination of excessive sovereign debt levels, aging populations and the financing needs re structural investments are so enormous that fundamental reforms to public finances are required and incentives are necessary to attract private pools of capital. European Governments need to plan long term and implement prudent fiscal strategies and, mostly, break with their practices of muddling-through with legal, procedural and national accounting tricks or political quick fixes.

National Debt Brakes Are Not the Answer

Ironically, Germany and Switzerland pride themselves of fiscal frugality as though their debt brakes are some sort of ‘Wunderwaffe’, incorporated in their national constitution. That is not so. A debt brake is a declaration of political failure and offers little information on how tax money was raised, spent or invested.

The balanced budgets have created a costly illusion hiding the ugly fact that Germany and Switzerland along with most European countries, have wasted their post cold war peace dividend on unsustainable social spending, wasteful subsidies and redistribution policies as opposed to investing in energy transition, transportation, digitalization, higher education and national defense.

Looking ahead things will change one way or the other. To rehabilitate and invest in longtime neglected critical infrastructure either taxes have to be raised, other expenditures cut or the debt will invariably increase.

Normalizing Capital Market Cycle – Risk On Strategy

The key driver for the capital market cycle remains normalizing inflation and interest rates. On March 21st Switzerland was the first major economy to start the interest rate cutting cycle – a clear boost. The Swiss National Bank (SNB) surprised the market with the decision to lower its policy rate by 0.25 to 1.5%. Assumingly, the SNB enjoyed the opportunity to signal some apparent independence but would not have done so if not strongly convinced that the FED and ECB will soon follow suit.

The monetary policy backdrop remains favorable for the economic outlook and investors’ confidence with risk assets and equities the asset class of choice. Our favored geographies remain the US, Europe and Japan, recently hitting new highs. Particularly attractive are the ASEAN and GCC regions as they are geo-economically well positioned regarding the big power competition between US and China benefiting from both sides.

Watch Out for Sudden Corrections

Risk assets are in a solid structural uptrend. They have, however, reached technically extended levels measured by price momentum, valuations, investors’ sentiment and volatility.

Low volatility comes with vulnerability, a correction could be around the corner, triggered by any adverse geopolitical, economic or corporate news. Prudent investors take some profits and raise cash for safe yield and optionality.