Geopolitical Confrontations and Economic Surprises to Dominate Global Capital Markets
Article from Beat Wittmann, Chief Investment Strategist @ Key Family Partners
US Elections – Kamala Harris is the Front-Runner
The US elections are this year’s most defining global event. Trump keeps suffering the loss of his opponent ‘Sleepy Joe’ and finds himself unable to deal with his new opponent Kamala Harris – the first female President of the US, I believe.
From an immediate capital market and economic perspective the US presidential outcome will have little impact. From a geopolitical perspective, however, a reelected Trump with his fondness of autocrats and dictators, as well as disrespect for democratic institutions and the rule of law would be a disaster.
Yet, clearly negative for capital markets would be a contested election outcome, far more than a Republican or Democratic win. This would lead to US political paralysis in a world of extensive geopolitical conflict.
On the economic front it is crucial to understand the three key bipartisan topics: decoupling from strategic rival China, particularly in technology, advanced manufacturing and finance; re-industrializing the US, thus reinforcing strategic autonomy and global leadership; adhering to ongoing deficit spending.
Imperial China – Key Global Risk Factor for 2025
The dire situation in China is as simple as it is clear and negative – China’s president keeps doubling down on putting his persona, power and party before people and performance. This has enormous and mounting consequences for geopolitics and global growth, inflation, interest rates and capital markets.
The implications extent to a strained and crumbling social contract between China’s leadership and the Chinese people. History at large tells us that situations as such lead to only two possible outcomes – either permanent economic decline, as in the case of Russia, or regime and policy change as demonstrated by former dictator Mao Zedong to reformer Deng Xiaoping.
In geopolitical terms the US deals with China as its primary strategic rival and Western powers follow suit. Europe, in particular, will not accept China’s huge trade surplus in context of China remaining a completely unacceptable ‘decisive enabler’ (NATO joint declaration) of Russia’s war against Europe.
Expect China to suffer from economic decline, negative capital market performance and growing structural imbalances as a result of politicized and misguided domestic economic policies and named confrontation with the West.
The economic downward spiral in China leads to falling demand and sinking prices for oil, materials and luxury consumer goods. The negative repercussions will be felt throughout exporting regions for oil and natural resources such as the Mideast and LatAm, as well as for European exports.
Europe – Top Priorities
We expect a much strengthened EU leadership under Ursula von der Leyen, Antonio Costa and Kaja Kallas – truly needed given the unprecedented geopolitical, economic and security challenges.
Unfortunately, the traditional engines of EU advancement, namely France and Germany, remain for the foreseeable future politically paralyzed by domestic self-absorption. The attention to the far-right ‘Rassemblement National’ in France and ‘AFD’ in Germany is causing much noise but little substance in regards to the march of populism and nationalism in Europe.
The gains for far-right and far-left parties in Europe reflect primarily the longtime and ongoing failure of the traditional centre-right and center-left parties to deliver national security, shared prosperity and a perspective for an attractive economic future.
Going forward it is key to judge populist parties by four factors: analyse the noise including polemics, fake-news, lies, demagoguery; assess economic policies as market-friendly or simply rent-extorting in favor of vested interests (eg farmers); scrutinize efforts to undermine democratic institutions, media rights and rule of law (eg Hungary); observe domestic repression and external aggression (eg Russia).
Europe’s top priorities requiring immediate action include: promote economic growth and productivity, facilitate innovation by relevant reforms to overcome fragmentation, particularly in finance and defense, and securing a competitive level playing field; massively increase long overdue investment in critical infrastructure sectors such as energy, digitalization and defense-industrial complex to deliver higher long-term economic performance and build a European security pillar; implement the capital market union to attract much needed private and public investment.
Given elevated sovereign debt levels, subpar economic growth and unprecedented and urgent investment needs in critical infrastructure and military defense, there is no alternative to a decisive and speedy creation of a full capital market union. The time could not be better time to invest in critical infrastructure and defense by issuing sovereign guaranteed defense and infrastructure bonds, given the enormous and immediate investment needs, a favorable outlook in regards to falling interest rates and fast-growing yield-driven investors’ demand.
Global Economy – Slowing Growth, Lower Inflation and Interest Rates
A key takeaway from the Jackson Hole Economic Policy Symposium is the FED’s shifting focus within its dual mandate from inflation to economic growth, as recent US economic data show key lagging indicators such as labor market and consumer price inflation declining, thus confirming a weaker economy.
We currently see a synchronized global economic slowdown and even face certain recession risks for 2025. However, central banks led by the FED have plenty of ammunition to loosen monetary conditions should economic developments and/or financial system stability require so.
In addition, the complex geopolitical outlook shows no end in sight for the wars in Europe and the Mideast and the possibilities for event risks and economic disruptions remains elevated. The biggest risk to the global economy in 2025, however, would still be a sharper than expected slowdown of the Chinese economy leading to significantly lower than anticipated inflation and interest rates around the globe.
Equities – the Asset Class of Choice in 2024 and 2025
The sharp but short-lived equity market flash-crash in August was mostly an idiosyncratic event – yet a warning. All relevant market indicators such as investor sentiment, price momentum, market volatility, breath and valuations are signaling further risks of market consolidation. All reinforced by an economic and corporate earnings slowdown and a traditionally weak September/October season. The relevant risk factors financial stress indices, corporate high yield spreads and bank shares remain resilient, however, they must be watched.
Equities remain the asset class of choice well beyond 2024 with a focus on the US and Europe. They are fundamentally supported by the still early stages of a tech-led productivity cycle, the positive multiplier effects of increasing investments in critical infrastructure and defense, as well as a positive backdrop resulting from an easing monetary cycle.
Key Investment Themes – 2025 and Beyond
The structural challenges regarding geopolitics, security and climate change require public and private investments of generational proportions, thus creating unprecedented investment opportunities.
We expect the leading investment themes to be technology, advanced manufacturing, infrastructure and defense-industrials.
