Protracted Conflicts and Market Movers

  |   Business, Geopolitics

Article from Beat Wittmann, Chief Investment Strategist @ Key Family Partners

Packed Global Agenda – Poor Prospects for Diplomacy, Ceasefires and Peace

June and July are packed with crucial elections and meetings amongst Western powers and its leaders including the EU parliamentary elections, the G7 summit and the Ukraine peace summit in Switzerland and ahead of us the European Council Meeting, French parliamentary elections, UK general elections and NATO summit, celebrating its 75th birthday – all leading up to and culminating with the US presidential elections in early November.

The geopolitical changes are epochal, the backdrop hostile and the various confrontations hardening and protracted with the epicenters the US China great power rivalry and Russia’s war against Ukraine and the European security order.

At this point we are not very optimistic about diplomacy for peace nor lasting ceasefires in any of the ongoing wars – neither between Russia and Ukraine nor between Israel and Palestinians. Regarding the anatomy of the respective military conflicts, there is no end in sight as we have entered the phase of attrition (the capacity to fight) that can be prolonged until exhaustion (the will to fight).

Western Powers Close Ranks

We expect strengthened political cohesion and significant increases in defense efforts in the EU thanks to a strong, incoming EU leadership headed by Ursula von der Leyen. In addition, the implications of a Trump 2.0 presidency would mean an accelerated increase in European defense spending within the NATO context, with annual spending rising from 2% to 3% of respective GDPs becoming the new normal – as already introduced into Poland’s constitution last year.

We expect political, economic and military confrontation with Russia for years to come. Judged by the ostentatious absence of Russia’s allies and friends at the Ukraine peace summit in Switzerland, notably China, and Moscow’s communications in regards to peace talks conditions it has become painfully clear that rehabilitation of a peace order and security architecture in Europe is currently not possible given Russia’s stance and could only be achieved by either exhausting or beating Russia militarily.

Negotiations and peace with Russia are only possible given full rehabilitation of Ukraine’s sovereignty, the return of all territories, reparations for full post-war reconstructions and Ukraine’s free decision regarding EU and NATO membership. Needless to say, Putin’s most recent ‘true peace proposal’ ( is worlds apart.

China and Russia – Limit(-less) Friendship

The Chinese leadership keeps doubling down on tightening its relationship with Russia, thus, increasingly supporting the war in Ukraine and against Europe. China’s respective actions, namely the absence at the Ukraine peace summit in Switzerland and the news coverage regarding the G7 in ‘Global Times’, the Chinese daily tabloid newspaper (, speak a clear language.

Sadly, and wrongly, the Chinese leadership refuses to acknowledge the costly trade-off between supporting Russia and benefiting from the enormous trade surplus with Europe. The G7 clearly voiced their opposition about China’s one-sided political, economic and – via supply of dual-use products, tech components and financial services – military support to build and grow Russia’s war economy.

Western sanctions and tariffs led by the US in areas of technology, industry and finance against China will continue and accelerate under the new EU leadership. As a result, China’s trade surplus with Europe will shrink for years to come – with all intended and unintended consequences. China would be well advised to understand that they are not alone in putting politics ahead of economics and business. No doubt, democratic and free market societies and systems will prevail over autocracies and dictatorships.

Greatest Macro Risk 2024/25 – Contested US Election Outcome

It is our firm conviction, that a contested US election outcome along with a sharp increase in domestic societal confrontation and subsequent policy paralysis will be the greatest macro risk in 2024/25. US business, consumer and investors’ confidence would be negatively impacted and along the currently strong economic performance, risk asset valuations and record low capital markets volatility.

The US economy and USD are so dominant regarding sheer size and superior performance that negative political and economic developments emanating from the US would have severely damaging consequences for the global economy and capital markets.

Europe – Ready! Set! Go!

EU parliamentary elections across all 27 EU member states were peaceful, orderly and not contested by anyone.

The results confirmed the political center with Ursula von der Leyen’s European People’s Party (EEP) as the biggest party and winner. However, there was a significant shift from green to far right parties. The common denominator pushing the far right, namely in Germany and France, was anti-migration sentiment. Election results will certainly influence agendas and priorities across the EU throughout the next legislative period.

The EU intents to send a strong political post elections leadership signal to the world stage. We are convinced that Ursula von der Leyen will be confirmed for a second term and other top jobs determined much sooner than usual. In particular, the relationship between the EU’s president of the commission and the president of the council will clearly improve, a drastic change from Ursula von der Leyen’s and Charles Michel’s stalemate.

Europe Meeting Russian Aggression with Realpolitik

The EU leadership will increasingly work in a more unified and forceful way to confront Russia and advance Europe’s strategic autonomy. The bigger representation of North-Eastern European countries and nomination of Kaja Kallas as chief of foreign affairs and security policy would send a particularly clear and positive signal. On the other hand, far right nationalist-populist obstructionists such as Hungary’s Victor Orban will increasingly be isolated and marginalized.

Europe’s Far Right – Delusional Economics Meet Reality and Markets

Far right parties, particularly in France and Germany, have increased their voters’ shares by a landslide. Capital markets are fearful that French snap elections could lead to a repeat of Le Pen’s recent European victory.

While the election outcome is uncertain the far right’s delusional economic program will certainly meet hard economic realities and international capital markets. However, pragmatism can win over ideology. Italy’s prime minister Giorgia Meloni, for example, has come around. The post Brexit economic adventures, however, swiftly forced the collapse of Liz Truss‘ government.

Europe to Promote Growth and Productivity

The only sustainable solution to Europe’s political, demographic, economic and security challenges is the promotion of higher and faster economic growth, productivity and prosperity. That, however, can only be achieved by structural reforms to strengthen the common market – as comprehensively and clearly outlined by Mario Draghi in his report on European competitiveness.

Key factors include national interests taking a backseat, fragmentation in areas such as banking&capital markets, traditional&alternative energy and defensive&industry reduced, and investments increased in all areas of critical infrastructure including science, higher education and innovation.

There is a structural and urgent need to attract and mobilize private and public capital for investment purposes. The financing of collective defense and critical infrastructure should include the issuance of bonds, thus facilitating the creation of a true European capital market union. Successes in the US demonstrate that consolidation and deepening of heterogeneous European capital markets for risk capital, equities and bonds are the only efficient and scalable route to sourcing funds and promote innovation and entrepreneurship.

Equities, Equities, Equities

Equities remain the asset class of choice. Western equity markets led by the US have continued to perform well mainly due to strong corporate earnings, and despite the absence of expected interest rate cuts. We do not believe that ongoing armed conflicts in Ukraine nor the Middle East will impact the global economy and capital markets in a fundamentally relevant way. The best outcome for global equity markets would be a clear and uncontested US election result, with Biden or Trump as winner, as clarity is positive for the US economy and capital markets in 2025 and beyond.

Given that outcome, Western equities would remain the asset class of choice and European equities in particular due to their significant undervaluation relative the US. In this context don’t underestimate Europe’s lifestyle power – European business, consumer and investors’ sentiment will enjoy a major boost from the ongoing European Football Championship hosted by Germany, the subsequent Olympic Games hosted by Paris and a 2024 European tourist season that is set to break all records.

In the short-term, however, equities face some risk of profit taking as, particularly in the US, valuations are high, price momentum extended and market volatility historically low. The underlying trends in equity markets are fundamentally well supported and the FED and ECB would have plenty of room to ease monetary policy aggressively should economic conditions deteriorate.

Conviction Favorites – OATs, European Defense, UK Equities

Our clear investment favorites for superior performance are:

We would aggressively buy French government bonds (OATs) as the spread to German Government Bonds (Bund) has widened due to concerns about French debt sustainability in the context of Marine Le Pen’s landslide win at the European elections and her aspirations for the upcoming French snap elections. However, we believe that French Government debt will be sustainable independent from the outcome of the elections and that France will remain a key pillar and strong supporter of the EU and the future of the eurozone.

On defense spending, Europe will have to massively ramp up its allocation to secure sovereignty. We expect the incoming EU leadership to set some clear and strong respective signals. Defense financing will become a top priority and is simply a matter of political will and priority. European defense firms are on track to multi-year superior growth, pan-European industry consolidation and equity out-performance.

The UK equity market has exceptional performance potential despite investor expectations and undemanding valuations. The main catalyst for UK equities will be the impending change in government and an overdue political normalization and economic rapprochement in relationship with the EU.