Europe, the U.S. and the New World Order : Defense, Capital and Investment in a Fragmented World

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

Escalation in Europe – NATO Rallies to Defend against Russia

Three main blocs in geopolitics are: revisionist aggressor Russia, fully supported by China; the unreliable and isolationist United States; and a fragmented and hesitant Europe. The security situation in Europe is continuously escalating. Russia and Belarus conducted the “ZAPAD 2025” military exercise in the highly sensitive security zone of Kaliningrad and the Suwałki Gap. Shortly beforehand, Russian drones violated Polish airspace. Poland and NATO reacted swiftly with enhanced drone defense measures, and crisis consultations were held under NATO Article 4. This led to the launch of NATO’s “Eastern Sentry” operation, with military support from Germany, Denmark, the United Kingdom, and France to strengthen defense along Europe’s eastern flank.

China’s Rise, America’s Retreat

China is steadily positioning itself as the driving force of a new world order, challenging the Pax Americana established after World War II. Ironically, its greatest enabler is the U.S. president himself. Through appeasement of Moscow and Beijing, a chaotic tariff war, hostility toward allies, and the erosion of U.S. institutions and rule of law, Trump is weakening the very foundations of America’s exceptionalism.

Debt-Brake Off, Defense On – Germany’s Race for Military Readiness by 2029

NATO Secretary General Mark Rutte and German Armed Forces Chief Carsten Breuer warn that Russia’s rapid military buildup could enable an attack on a NATO member within four to five years. In response, NATO agreed at its June summit to raise defense spending from 2% to 5% of GDP by 2035—3.5% for troops and weapons, and 1.5% for infrastructure such as cyber, transport, and energy. Germany, citing greater urgency, plans to reach the 3.5% target for the Bundeswehr by 2029, suspending its debt brake to do so.

Berlin’s Investment Surge: Defense, Infrastructure and Industry

Germany has entered a major investment cycle focused on defense and infrastructure, with stock markets in both Germany and the U.S. pushing to new highs. A prime example is Rheinmetall, whose accelerated organic and inorganic growth is turning it into a leading European defense champion, now valued at €100 bn—on par with U.S. giants like Lockheed Martin and General Dynamics. At the same time, Germany is scaling its advanced industrial base and, in robotics, ranks among the global top five—making it the only non-Asian country in that league, while the U.S. trails at 10th.

Powell Navigates Tightrope as FED Cut Rates

The Fed faces a delicate balance between its dual mandate—full employment and 2% inflation—while maintaining independence. We expect Chair Powell to avoid both front-loading (inflation risk) and back-loading (recession risk) interest policy.

With a 25bp cut to 4.00–4.25%, the easing cycle has begun, leaving room to support a slowing economy or respond to financial shocks. The U.S. outlook features a softening labor market, sticky inflation, resilient corporate earnings and consumption, and an AI-driven investment boom. Politically, polarization persists, with Trump intensifying his nationalist-populist challenges to institutions and the media.

Tariffs, Trade and Turbulence – the U.S. Impact Globally

The US President is expected to continue his erratic trade policies, marked by unpredictable tariffs. International responses vary: China remains firm and ready to retaliation, Japan reluctantly accepts absurd U.S. terms, the EU remains too disunited to leverage its economic weight, the U.K. maximizes its soft power effectively, and Canada and Mexico, as direct neighbors, navigate a principled yet pragmatic course.

Regionalization – the Dominant Global Investment Trend

We anticipate an acceleration of the structural trend toward regionalization of capital, investment and currency flows. This reflects the U.S.-driven assault on multilateral trade institutions, risks of dollar depreciation from declining interest rate differentials, a weakening fiscal position, and frequent weaponization of the USD—factors that incentivize repatriation of funds (and gold). Accordingly, the investment recommendation is to prioritize assets within one’s own geographic region and reference currency.

Equities Remain the Asset Class of Choice

Global equity markets are hitting all-time highs, with greed dominating fear. While overvaluations, price overshooting, and record insider selling signal caution, U.S. market strength may persist, fueled by liquidity and speculative momentum. Financials, technology, industrials, and large-cap growth stocks—the main beneficiaries of monetary easing—are likely to remain top performers.

Bullish on Europe – Opportunities Amid Political Gridlock

EU President Ursula von der Leyen’s State of the Union address promised much but delivered little results on key reforms. One year after Mario Draghi’s recommendations on EU competitiveness, progress on boosting growth through integrated banking, capital, defense, and energy markets remains limited. The obstacles are twofold: Brussels’ self-absorption and lack of focus, and national capitals’ inertia, often driven by entrenched interests. Meanwhile, the political middle ground’s complacency continues to fuel voter support for ultra-nationalist populist parties.

Despite this, we remain bullish on Europe as equities are driven by earnings, capital flows and growth prospects. Attractive valuations, supported by unprecedented European investment in defense, industry, technology, and critical infrastructure, provide a positive outlook. Equities, as leading indicators, suggest continued outperformance in finance, defense, industry, and technology sectors.