Upcoming Disruption and Volatility – Time To Be Defensive
Article from Beat Wittmann, Chief Investment Strategist @ Key Family Partners
Biden is Out – Wide open US Elections
President Biden is dropping out of the presidential race – better late than never. Yet still, geopolitics remain dominated by nationalism, protectionism and populism. And sadly, the highly polarized political climate won’t get better, even after the failed assassination attempt on Trump.
In the attack’s aftermath, a Trump-Vance victory appeared very likely. With Biden no longer in the race, however, the election outcome is wide open again. It is my conviction that the Democrats stand the biggest chance to beat Trump if they run an open candidate selection process and choose a fresh face, namely a centrist, business friendly and experienced female candidate such as Gretchen Whitmer (Governor of Michigan) or Gina Raimondo (US Secretary of Commerce) when gathering for their National Convention in August.
But let us be clear, the worst case would not be a Republican or Democratic win but a contested election outcome as that would lead to US political paralysis in a world of extensive geopolitical conflict.
Apart from the US election outcome there is strong bipartisan stance in the US on two key topics and that is crucial, decoupling from China, particularly in technology, manufacturing and finance and re-industrializing the US.
China – Party Before People
China’s third plenum concluded last week. It is a strategic economic policy meeting that takes places every five years. The subsequent state media communications was showering praise on the wisdom and achievements of Xi Jinping’s leadership but was short on concrete strategy and even more so in communicating overdue reforms.
This is painfully clear in regards to the ongoing and unsustainable over-reliance on investments and exports and lack of household consumption and services sector expansion. The key problems, namely excessive local government debt, aging population and high youth unemployment, remain unresolved.
It is plainly clear that China’s supreme leader continues to put ideology and the party before citizens, economy and business. As a result, China will continue to suffer from anemic economic growth, subpar capital market performance and growing structural imbalances.
China, in the case of a Trump 2.0 scenario, will be immediately confronted with sharply higher tariffs and also forced to painfully realize, that their support of Russia against Europe is no longer viable as they depend on the huge trade surplus with Europe.
Europe – Strengthened Leadership and Cohesion
In Europe, EU president Ursula von der Leyen has been re-elected with a clear majority. We expect a decidedly strengthened EU leadership able to effectively deal with a hostile Trump administration, the enemy Russia and its supporter China. Needless to say, this means unprecedented transatlantic turbulence, promptly and significantly higher defense contributions to NATO to build Europe’s security pillar against Russia and a trade and economic showdown with China.
We expect political cohesion in Europe faced with the geopolitical and security challenges to improve drastically. A key element will be a steady rapprochement with the newly elected UK government under the pragmatic Keir Starmer. In addition, we expect political adversaries and economic free-riders from within Europe, exemplified by Hungary’s Victor Orban, to be marginalized and isolated.
Global Economy – Slowdown H2 2024 and 2025
In recent years, the US has been the best performing economy by a wide margin, both cyclically and structurally. Now, however, key lagging indicators such as labor market and consumer price inflation are softening, thus confirming a weaker economy. As a result, we can expect a more synchronized global economic slowdown in 2025. The central banks, however, led by the FED, have a lot of leeway to mitigate a recession or event risk disruptions.
Given the geopolitical outlook, the risks for economic and trade disruptions remain elevated and are set to potentially escalate. In this very context, it is key to reflect on the ruthless disciplinary power capital markets typically exert on any politician engaging in damaging or crazy economic policies rooted in delusional populism and wishful thinking – most recent example is Brexit and former PM Liz Truss.
Capital Markets – Time to be Defensive
Most developed countries’ equity markets, led by the US, enjoyed another strong year-to-date performance. Now all relevant market indicators such as investor sentiment, price momentum, market breath and valuations are signaling overheating, introducing the next phase of profit taking, market correction and consolidation. Ironically, volatility remains historically low, due to a high degree of investor complacency, thus offering attractive terms for portfolio insurance.
The above will be reinforced by an economic slowdown, a seasonally weak September/October period and US stock markets traditionally performing weakest in the first year of a presidential term.
Defensive asset allocation means a preference for cash, government bonds, high quality corporates and long term growth sectors with strong balance sheets, while avoiding high-yield debt and investments exposed to China and Russia.
We face a normal and healthy cyclical correction within a secular uptrend supported by investment in critical infrastructure and a productivity trend driven by technology and innovation.
Equities remain the asset class of choice with a focus on the US and Europe with a shorter-term preference for value stocks and longer-term focus on growing defense, industry and technology sectors.
