DETAILS MATTER

EMR November 2024

Dear reader

WHICH WORLDVIEW WILL PERSIST?

The US election campaign ended with the victory of Mr. Donald Trump. At this first viewing we assume that the new Administration might be focusing mainly on US domestic advancement i.e. issues that will be decisive in transforming the US economic setting. Foreign policy will also continue to play an important role. It should not be forgotten that the recent US election campaign and election took place in concomitance with two ongoing wars, and, particularly also, in a context of radical redefinition of the national powers. In other words, representing the redefining of international power, which might continue to be promoted by the “revisionist” coalition, i.e. of China, Russia, Iran and North Korea, as well as a “global South” (Brazil and India). In addition, we see that the European developments are hardly reassuring. The positioning of the President elect, Donald Trump, stems from the well-known division between the isolationist and internationalist orientations of the foreign policy of the USA. In addition, we ought to keep in mind that the president elect, Donald Trump, is a neo-isolationist with a strongly unilateral instinct.

At this crossroads, one might assume that the United States is focusing on the pursuit of political hegemony by equipping itself with unprecedented military strength; somehow independent of its own democratic values. Donald Trump’s orientations go back to the well-known split between isolationist and internationalist orientations in foreign policy, and this not only in the USA. In the post-Cold War era, the internationalist vision triumphed despite the defeats in Afghanistan and Iraq in response to the terrorist attack of September 11, 2001. Nevertheless, the internationalist vision continues to dominate.

In the current post-election period – especially for the US – it will be imperative to build a new alliance system without abandoning the international role of the United States. The confrontation with the new presidency will be, on the one side, about the management of the Russian invasion of Ukraine and, on the other hand, about the inability to “contain” the key players in the Middle East. Lurking in the background will be attempts to contain expansion of China`s influence in the third World and the immediate threat to Taiwan. Furthermore, we will have to seriously consider the actions and reactions to the influx of legal and illegal people in search of a job, as well as liberty.

In the aftermath of Donald Trump’s victory, the global community will probably expect even less, than it did from the Biden administration, and this on the basis of an even stronger isolationist instinct, as already demonstrated by the first Trump administration.

SHORT – TO MEDIUM – TERM ASSESSMENT

Currently, due primarily to the US election outcome, the economic setting is in a state of high vulnerability, which makes any quantification difficult. In addition, the environment continues to be burdened by the Russian war against Ukraine, technological interdependencies (West-East) and especially the localization and re-localization of technological innovation. All developments pointing to an increasingly divided economic setting. The dependence of Western economies on fuel imports from politically unstable countries does not promise rapid change, neither in the short nor the medium term. Furthermore, political struggles in industrialized economies (see, for example, Germany) do not bode well for inflation and the expected reaction of monetary authorities. A new factor, rather difficult to assess at this time, will be the President-elect Trump’s focus on “America first.” From various available political comments, there seems to be no doubt at all, that changes in international trade flows could be significant in both the short and the medium term. At present, we believe that an increase in inflation differentials should also be taken into serious consideration.

Tricky questions at this time:

Technology: The announced relocation of technology production lines to the United States will undoubtedly change the international flow of goods and services as well as of pertinent prices. The effects will primarily be felt by “low-cost producers” such as China and the Far East in general. A further impact is perceived in the feared increased “repatriation” of skilled workers to the USA. The effects on employment, wages and overall inflation cannot yet be predicted with sufficient accuracy. They seem to point to short-term volatility in both employment and inflation. How this “reorientation” could affect the national and global economy is currently the real question.

Current expectations for 2025 indicate further interest rate cuts. The Fed is expected to cut the benchmark rate at the December 2024 meeting. This would imply a full percentage point for 2024! To avoid a surge in inflation in 2025, further interest rate cuts should be expected. We wonder what the implications will be on economic growth, inflation differentials, and other countries’ currencies, in conjunction with the heralded drastic change in policy not only by the United States. Any suggestions?

The graphical representation of the price performance of various share indices, for the period since 30 September 2020, speaks volumes. Outperformers are the NDX index with +84.8%, the S&P500 (+78%); the NASDAQ (+72,2%) and the NIKKEI (+67%). The worst performers – in local currencies – are the FTSE (+36,9%) and the SPI (+ 22,5%) Indexes. The CAC40 and the SX5P indexes performed marginally better than the SPI and the FTSE indexes. At this point, the question arises: What can be deduced from these major differences?

First of all, for the period under review, the most profitable engagements were due to the exposure to technology. Determining have also been the economic developments in the single European countries. A further aspect of significant influence has been and will continue to be the whereabouts of the respective currencies.

Of deterministic relevance have been the reactions of equity indexes to the record intervention in the foreign exchange markets, since 30.09.2020. See following chart.

Setting the focus on the data in the table and chart, we sense a differential impact of inflation management on the individual stock indices. In this context, the performance of the NIKKEI index is puzzling compared to all other indices except the NDX. There is no doubt that the trends observed point to a greater impact of technologically advanced products.

What is not obvious is the impact of and on currencies and consequently on country allocation, as shown by the rather low growth of the SMI (Swiss Market Index) compared to all other indices in their respective currencies. We therefore maintain a rather restrictive country allocation based on technological innovation and financial management.

We assume that the outcome of the US elections will have a significant impact on investment policy in the coming months and quarters and years. This means that more attention needs to be paid to volatility, economic expectations, and the management of interest rates by monetary authorities.

Accordingly, we maintain a rather restrictive country allocation based on technological innovation and financial management capabilities. This means that more attention will need to be paid to volatility, economic expectations, and interest rate management by the monetary authorities.

Suggestions are welcome.