Capital Flows in an Age of Confrontation
Article from Beat Wittmann, Chief Investment Strategist @ Key Family Partners
Positioning Portfolios for a Fragmenting World
The start of the 2026 investment year once again confirms that generating positive and competitive investment performance in a risk-heavy environment requires an interdisciplinary understanding of geopolitics, economics, and capital markets. Success depends on separating omnipresent news noise—often emanating from autocrats and populists—from facts, data, and structural realities.
Our 2026 investment outlook, “Power, Politics and Portfolio Positioning,” remains firmly validated. We are living through epochal shifts in politics, technology, and economics. Hard power politics have returned as the dominant organizing principle of international relations, driving a durable fragmentation of the global order into three structural blocs: the Americas, Europe, and Asia. These blocs are not decoupling entirely but are moving into a phase of intensified de-risking while maintaining indispensable economic coexistence. Globalization continues—but in a rewired and politicized form.
Europe’s Strategic Imperative: Sovereignty in Defense and Finance
European sovereignty ultimately rests on Europe’s ability to mobilize its own savings and rapidly convert them into strategic capabilities. This makes the completion of the Capital Markets Union and the construction of a credible European Defense Union not parallel policy projects, but mutually reinforcing pillars of a single sovereignty agenda.
Large-scale investments in defense, critical infrastructure, and strategic technologies cannot be financed sustainably without deep, liquid euro-denominated capital markets. A permanent EU-level European Defense Bond program is therefore indispensable. Such issuance would align financing capacity with Europe’s security requirements while simultaneously strengthening financial autonomy and the international role of the euro.
Europe’s ability to politically act decisively—and in time—will determine whether it can truly finance and secure its future. From an investment perspective, this underpins our continued preference for Europe as a geographic allocation and for EUR and CHF as reference currencies.
NATO, Ukraine, and the Shifting Balance of Transatlantic Dependence
In the short term, Europe remains more dependent on the United States, particularly for strategic enablers such as airborne command and control, intelligence, surveillance and reconnaissance (ISR), and space-based capabilities. However, the medium- to long-term balance of dependence increasingly runs the other way.
US global power projection depends structurally on European-based logistics, infrastructure, and forward deployment. Moreover, European procurement of US defense systems and European capital flows financing US deficits are, in effect, indirect contributors to US defense spending itself. Transatlantic dependence is therefore reciprocal—but asymmetrically misunderstood.
This reality strengthens the strategic case for European defense-industrial integration and reinforces our conviction that the European defense–industry–technology–infrastructure–finance complex will remain one of the most attractive and structurally supported investment themes for years to come.
The United States: Political Hyperactivity and Market Implications
The United States remains, for now, the epicenter of global politics, economics, and capital markets. However, we expect its relative position to erode gradually as the current administration pursues a unilateral, hard-power-driven, populist, and protectionist agenda—in disregard of international rules, contractual obligations, and long-standing alliances.
Recent actions, including open threats against NATO partners and the Greenland annexation rhetoric, exemplify this trajectory and have driven US popularity among European populations to historic lows. The dominance of the US administration and aligned corporate leadership at the 2026 World Economic Forum in Davos further accelerated this trend, while Canada’s Prime Minister Marc Carney articulated a compelling counter-narrative centered on democratic middle powers.
The rupture in transatlantic relations is deeper than publicly acknowledged, masked by widespread self-censorship driven by fear of retaliation from the US administration. While US geopolitical hyperactivity—from Latin America to Iran—grabs headlines, domestic economic performance and cost-of-living pressures will remain decisive for US midterm voters. Trump’s overriding focus on personal enrichment and political survival increases the risk of erratic policymaking as constraints tighten.
From an investment perspective, we maintain that global equities remain the asset class of choice. A firm “Trump put” underpins risk assets, as the administration will do whatever it takes to avoid a midterm defeat. In this context, the appointment of Kevin Warsh as Fed Chair is not a material cause for concern. Sector rotations and elevated volatility are healthy market dynamics, not structural threats.
China’s Mercantilism and its Global Consequences
China continues to double down on an aggressive mercantilist strategy, attempting to export its way out of domestic economic weakness. This approach increasingly collides with European interests, particularly given China’s sustained political, technological, and economic support for Russia’s war against Ukraine—an alignment that Europe finds unacceptable.
Domestically, China’s Xi Jinping is consolidating power through continued purges of the leadership apparatus, reinforcing personal and centralized control. Internationally, renewed efforts to promote a greater global role for the renminbi merit close attention, particularly as any gain in reserve currency status would come at the expense of the US dollar.
The key takeaway is that globalization is not ending—but transforming. Trade, capital flows, and supply chains are being structurally rewired along geopolitical lines. In this environment, disinvestment flows from US financial assets and the USD are only beginning. These flows are set to benefit European and Asian markets, which we expect to continue outperforming the US over the medium term. As the world’s largest debtor nation, the US remains structurally dependent on the continued confidence and capital of European, Middle Eastern, Chinese, and Japanese investors—a vulnerability that markets should not underestimate.
