Cash is OUT – the Chase for Yield and Capital Gains is ON
Article from Beat Wittmann, Chief Investment Strategist @ Key Family Partners
Geopolitical Conflicts to Dominate Economies and Markets in 2025
Our age is defined by increasing geopolitical confrontations encompassing old ills of ongoing hot wars in Eastern Europe and the MidEast and generally increasing populism and protectionism.
We also live through a phase of creative destruction and technological transformation that often result in disorientation and distress but ultimately provide better quality of life for ever more people.
However, for investors to successfully navigate these upheavals, disruptions and challenges, they need independent thinking, clear sighted strategies, ongoing adaptability and disciplined execution.
The US Elections – The Choice is About Democratic Order
This year’s key event to shape global developments for years to come will be the fast approaching US presidential elections on November 5th, 2024. Our bet (and hope) is on Kamala Harris. However, only a contested election outcome with ensuing political paralysis would have a negative impact on capital markets.
A Donald Trump win would put the rules-based and democratic order at risk in the US and abroad, given his cozying up to autocrats and dictators while undermining the West’s economic and security alliances.
China’s Paramount Leader – the Number One Risk Factor in 2025
The number one geopolitical and economic risk factor to watch in 2025 will be China, namely its president. The combination of China’s hard power projection of supporting Russia in its war against Europe and confrontations against Taiwan and in the South Chinese Sea, while economically benefitting from its record export surpluses to the US and Europe, in particular, yet facing domestic economic decline bodes badly for the global economy in 2025.
We expect China to suffer significantly lower than expected economic growth and rising unemployment due to its misguided economic five year plan and capital expenditure priorities, leading to entrapment into a deflationary spiral – and a major exporter thereof. We assign a very low probability to China’s leadership changing course but a high probability of social unrest to ultimately change the situation – similar to the ending of the damaging and nonsensical Zero COVID policy.
China has entered an ominous phase of balance sheet recession or ‘Japanification’, the multi-fold structural trap of slump in demand, entrenched deficits, poor demographics, asset price declines, financial stress and persistent deflation. However, China, very much unlike Japan in 1989, is not a rich country to start with and the Chinese president is definitely not a reformer like Japanese premier minister Shinzo Abe.
Japan lost over two decades until Abe introduced his signature ‘Abenomics’ reforms in 2012, consisting of the three arrows reflationary monetary policy, fiscal expansion to stimulate demand and consumption and domestic reforms to improve competitiveness and encourage private enterprise investments.
Europe Needs a Strategy for Growth and Competitiveness
Europe is absorbed by the formation of the new EU Commission under the leadership of Ursula von der Leyen, Russia’s military aggression against Ukraine and the European security order, Mario Draghi’s report on European competitiveness and political paralysis in France and Germany with upcoming federal elections in September 2025.
Draghi’s report is highly recommended reading, and there is also an excellent summary and evaluation by the London domiciled think tank Centre for European Reform (www.cer.eu). Draghi delivers a clear and comprehensive analysis of Europe’s anemic growth and productivity, particularly, against the thriving US economy.
His key recommendations to lift economic performance and productivity to compete on a global level include overcoming fragmentation, boost labor and capital productivity, reduce red tape and simplify regulation. To successfully implement such much needed and long overdue reform and growth programs, investments from public and crucial private sector sources are needed on a very large scale, with focus on infrastructure and digitalization.
In order to meet the future financing requirements, establishing a fully functioning euro capital market union and pan European banking
consolidation are a ‘conditio sine qua non’. Public investments and the issuance of common euro-denominated debt should focus on common goods with classic externalities beyond national borders such as climate change and security and defense.
German Public Finance Management – Not Frugal but Frivolous
Unfortunately, yet not unsurprisingly Draghi’s report and recommendations have met an immediate hostile reception from national policymakers led by Berlin, ironically from the same people and parties who are directly responsible for German’s current economic malaise and who would stand to benefit most of the recommended reform and investment program.
The self-acclaimed German frugality in public finance is a myth and the sad and costly reality is that subsequent German finance ministers from Wolfgang Schäuble to Christian Lindner have wasted the peace-dividend and engaged in frivolous social and subsidies spending while near totally neglecting investments in critical infrastructures and security and defense. Signs thereof are collapsing bridges, a dysfunctional Bundesbahn and the Bundeswehr far from combat-ready.
The much celebrated but self-harming federal debt brake, the incarnation of economic and fiscal self-delusion, tops it all. Needless to say, I am in favor of sound and long-term sustainable public finances. The debt brake in Germany (and Switzerland), however, pursues an ill-advised and misleading ‘accounting-approach’ to fiscal policy. Crucially, this approach doesn’t differentiate spending and/or debt raised for consumption purposes (social spending, transfer payments, subsidies) and financing investment (digitalization, communications, education&research, public transport, national security, energy).
The US Keeps Leading the World Economy and Markets
The FED kicked off its easing cycle with an unusually large 50bp cut and they did this because they can. It is certainly good news for markets and the economy, yet, bad news for Donald Trump. It is a signal of confidence that inflation is beaten and that the focus is now on the other side of the dual mandate, the labor market.
Watching global economic and financial data, the message of a declining global economy, falling inflation rates and oil prices as well as rising unemployment is crystal clear. Reassuringly, the US economy remains well positioned for a soft landing. However, keep watching that all-important US consumer behavior.
Europe, so far, remains stuck in self-inflicted stagnation. It remains to be seen what priorities will be set by the new, more unified and forceful EU Commission. The crucial challenges will be to overcome fragmentation in finance and defense, to heavily invest in critical infrastructures and attract private capital via a true capital market union.
In 2025 a globally synchronized slowdown is mainly due to an ever weaker China, exporting deflation, leading to lower than expected global inflation and interest rates. The US will keep dominating geopolitics and the global economy by a wide margin because of its leading role in finance, technology and defense, while being self sufficient in energy supply.
Cash is OUT – the Chase for Yield and Capital Gains is ON
With the FED’s interest rate cut and all relevant global economic indicators signaling a downturn, cash is out of favor as an asset class as interest rates have entered a downward trajectory.
Equities are the asset class of choice and high grade government bonds serve as the optimal complementary investment. Gold and the Swiss Franc continue to provide best-available safe haven benefits. We expect major and growing demand for private markets equity and debt, particularly, in all areas of critical infrastructure.
Our favorites for 2025 include, geographically speaking, the US, Europe and ASEAN. From a thematic point of view, we favor technology, infrastructure, industry and defense. We would avoid China and exports related to it.
