Investments in an Upended World Order

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

Geopolitics are dominated by President Trump unleashing a flood of executive orders, Russia’s relentless military aggression against Ukraine, China’s focus on building an alternative geoeconomic order and by newly elected German Chancellor Friedrich Merz hopefully delivering on German recovery, European strategic autonomy and independence from the US.

It has become abundantly clear that the global post WW ll political, economic and security order is a thing of the past. In this context, Donald Trump is not only a symptom of the times since the 2008 financial crisis but also the catalyst and accelerator of the ongoing shattering and dismantling of the globalization since the early 1990s. As a result, we see the emergence of a new world order with many intended and unintended consequences regarding macroeconomics, business strategies and financial investments.

In the future, expect the strongest economic and capital market performances in geographies that achieve to combine rule and institutional-based democratic orders with a competitive, productive and business friendly ecosystem. On the losing end we will find various forms of autocracies pursuing nationalistic, isolationist and protectionist economic policies.

Donald Trump – You Get What You See

President Trump has inherited a strong US economy with booming financial markets – US exceptionalism priced to perfection. Trump, however, has wasted no time to destroy trust by engaging in highly damaging political and economic confrontations at home and abroad, without respect for the rule of law or courts, the separation of powers or respect for agreements and contractual obligations.

By now, all relevant economic and capital market data cast a crystal-clear verdict on Trump’s first hundred days in office. Economic and sentiment indicators plummeted while equities, bonds and the US Dollar declined. Trump then blinked when all capital markets, including safe haven treasuries, indiscriminately and heavily sold off in the wake of his ‘Liberation Day’ global tariff assault.

Make no mistake – Trump’s tariff jo-jo by no means indicates a more steady take on tariff policy going forward. His destructive tactics will find new aims! Expect Trump to continue his attack on FED chair Powell and the central bank’s independence risking trust in the integrity of US capital markets and the role of the US Dollar as the leading reserve currency. Expect Trump to challenge US courts testing the limits of a constitutional crisis. Expect Trump to undermine and subvert multilateral institutions including the G7 and NATO.

US, EU and China – Fractured Globalization

The three geopolitical and economic superpowers in the world are the US, the EU and China. Trump’s unilateral and hostile actions erode the US’ dominant position into strategic isolation, after eighty years of benefitting from a globalized rules-based multilateral order it had initiated, grown and led.

Yet, Trump not only geopolitically and economically miscalculates China and Europe, but also other powers as direct neighbor Canada and hostile Russia. China is pragmatic and principled, never yielding to what its emperor sees as disproportionate and unacceptable US pressure. The EU employs a wait-and-see attitude and leaves the door open for a mutually beneficial trade deal rather then ending up in a lose-lose situation of a Transatlantic trade war.

Time is working for the EU and China. Unlike the US, they will not face mid-term elections next year. The EU and China’s respective weaknesses and shortcomings are largely self-inflicted and can be addressed by striving for EU strategic autonomy in defense, energy and finance and China moving its economy towards consumption and services.

In Search of Courage

Every crisis and every decline, in countries or corporations, can and should be a fertile field of opportunities for new leaders and new policies. The big question – who will rise to the occasion and deliver effective leadership yielding superior results? Watch out for two newly elected leaders in exemplary democracies with the potential to manage changes in their respective countries structural trends and economic fortunes and meaningful impact on the global stage – Canadian Prime Minister Mark Carney and German Chancellor Friedrich Merz.

Canada’s Mark Carney is as a passionate liberal the anti-thesis to Trump, who keeps threatening to usurp longtime close friend and ally Canada as the US’ 51st State. Carney is a strong leader and an outcome-driven pragmatist steeped into realpolitik of doing what needs to be done. Carney understands that Trump only respects strength. The new Canadian premier lived and breathed global governance inside-out given twenty years leadership experiences at the helm of the Bank of Canada, the Bank of England and as Board Chair of Bloomberg and Brookfield Asset Management. His credentials and network in global business and politics are of unparalleled quality and depth. As host of the G7 summit in Alberta, Canada on June 15-17 and member at the NATO summit in The Hague, Netherlands on June 24-25 Carney will have two high profile opportunities to impact geopolitics.

Germany’s new chancellor Friedrich Merz is self-assured, internationally engaged, an unshakable and deeply committed European and staunch Atlanticist. His top policy priorities are tightly managed migration, introduce overdue reforms and investment in critical infrastructures to revive competitiveness and economic growth and rehabilitate national security and armed forces. Merz clearly understands that autocratic, nationalist and hostile leaders in Washington, Moscow and Beijing only respect strength and that Europe’s key to prevail as relevant superpower is Germany back at the center as a leading political actor within the EU, re-establishing itself as an economic powerhouse. Merz will not have a hundred days honeymoon, as his low popularity and the need for a second voting-round in the Bundestag have shown. Contrary to consensus, however, we think that low expectations will play to his advantage and he possesses the will, skills and resources to lead his conservative-social democratic coalition to success. Clearly, the proof is in the pudding and the German Government will be measured by tangible results and not by hopes and promises.

Cycle or Crisis

What next – a cyclical recession, economic cracks and deepening fault lines or breaking weak links escalating into a financial crisis. It will be up to the US with its all important consumer as ‘spender of last resort’. The relevant stress-test indicators to watch are the most fragile links in the system, namely illiquid, hidden and leveraged specialty and alternative financial assets including corporate high yield debt, hedge funds and crypto-assets.

So far, capital markets have remained complacent and partially discount an economic downturn along the IMF’s recent Global Economic Outlook saying that ‘growth is to decline and downside risks to intensify as major policy shifts unfold’. We think, however, that policymakers and investors don’t pay enough attention to negatively reinforcing dynamics regarding geopolitics, economics and financial markets. They remain stuck in the silo-mindset of past experiences – good or bad. The downside risks of a cyclical bear market or financial crisis are primarily due to the US led tariff and trade war unseen in a century including a substantial loss of trust in US economic policymakers resulting in a highly unpredictable business and investment environment.

Focus on Trump and his highly damaging and nonsensical economic policies creating maximum uncertainty in minimum time for investors, consumers and businesses alike. Trump will continue to blink when capital markets revolt. Expect, however, the politically besieged FED to focus on its double mandate of containing inflation and securing employment, only to intervene in case of a major event risk endangering overall financial system stability.

The Capital Repatriation Imperative

Unraveling geopolitical order and fragmenting globalization bring reduced productivity, higher costs, lower economic growth and corporate earnings as well as a sharp increase of uncertainty and loss of confidence, all resulting in defensive behavior and a home bias of economic actors and capital flows. In this context, most exposed to risk are the US, having attracted enormous inflows of investment capital for decades due to its superior ecosystem based on leadership in science and technology, capital markets and entrepreneurship.

And now? What are the economic consequences of MAGA Trump. The highly indebted US depends on large inflows of foreign capital. As long as US financial assets outperformed and the rule of law was guaranteed this was not a problem. Now, however, foreign investors have only just started to rebalance their capital allocations away from the US. Given today’s circumstances, US financial assets are set to structurally underperform throughout the Trump presidency. A growing risk premium will be required to compensate for the lack of policy visibility and the weakening of the constitutional framework.

Global investors are well advised to make their respective home regions, countries and reference currencies their core investment exposures. In 2025 and beyond, we expect Europe to continuously outperform by a wide margin. In terms of geography we favor Germany and for sectors the defense-industrial complex. There are two key drivers for superior returns in European financial assets. First, Europe is firmly committed to multilateral cooperation, strong institutions and the rule of law. Secondly, expect fiscal expansion and massive investment in strategic autonomy including energy, defense and capital markets.