Our colleagues in the banking world have a ritual at the turn of the year of drawing up their scenarios for economic developments in the coming year and using them to determine which asset class is likely to generate which returns. Naturally, we follow their deliberations with interest. We also base our investment strategies and the short-term tactics we choose on economic expertise. This year, a problem has arisen that even the very experienced among us have rarely experienced: The forecasts of our partner banks resemble each other like one egg to another - of course there are white, yellow, smaller and larger eggs, but the visual impression is nevertheless that of an egg. We will come to describing the egg in a figurative sense in a moment; the similarity is not a problem in itself. The latter lies rather in the dissonance with our perception that we are in a phase of upheaval in which various certainties of the last three decades are being called into question. In retrospect, phases of upheaval are not described as "business as usual"; but this is exactly what our colleagues in the strategy departments of our partner banks are saying by and large:
The global economy is likely to grow moderately next year. The USA is in a better position than the rest of the world. Inflation, which remains stubbornly above the desired level in the USA and Europe, should continue to weaken and interest rates in these currency areas should fall. Switzerland is ahead in this respect and already has low interest rates. The new government in the USA will introduce tariffs to enable the development of domestic industries. It will reduce regulations and lower taxes. This should trigger an investment boom.
This scenario suggests that equities, including those in the already very expensive US equity market, will continue to yield well, albeit less than in 2024. European and Asian equities are much cheaper, but their economies lack momentum. However, the falling interest rate environment is also helping these investments, so a positive return is expected. Bonds in Europe and America are a buy, but Swiss bonds are not, as the yield level is already too low. Gold continues to benefit from rapidly growing government debt and real assets such as property should also be able to generate attractive returns.
This is basically a coherent scenario and a very favourable one at that. We can also largely follow these considerations. So what should the upheavals we see consist of? The argument cannot be summarised in three sentences; we will try to formulate it as briefly as possible: Relatively often reference is made to the tariffs threatened by the US president-elect, which represent a striking departure from the neoliberal thinking inspired by Nobel Prize winners Milton Friedman and Friedrich von Hayek in the 1970s and 1980s. Bridgewater Associates, a hedge fund, has coined the term "New Mercantilism" for this: four elements are typical, namely that the state orchestrates the economy (in contrast to the free market), that trade balances are maintained and controlled as a determinant of national prosperity, that industrial policy should guarantee a certain degree of self-sufficiency and finally that large national companies are protected from competition.[1] Tariffs are an effective means of realising these economic policy ideas. However, the argument ignores the fact that Ronald Reagan, who epitomised the renunciation of state interventionism and the turn to neoliberalism, imposed many tariffs himself, e.g. on Japanese cars.
No, the tariffs are a symptom of the failure of a world trade system that Niall Ferguson, the British economic historian, called "Chimerica" and Barry Eichengreen and others called "Bretton Woods II": The USA consumes goods that are produced in the Far East, where the proceeds of this trade are in turn invested in USD. China thus became the world's workbench, but the Chinese did not develop a broad-based consumer society; instead, they built up large savings, the availability of which lowered interest rates in the West, but also led to a property bubble and obsolete infrastructure in China. Low-cost production in the Far East structurally lowered prices in the West and curbed wage increases for workers - there was always the threat of jobs being relocated to a cheaper country of production. This Bretton Woods II crisis has not only existed since the re-election of Donald Trump. Pushed into the background by the pandemic, it has existed for some time. Even in the 2010s, more globalisation and free trade were no longer seen as the recipe for giving the economy a boost: If we flash back a dozen years, we might remember the gloomy diagnosis of "secular stagnation". The basic thesis was that, for a whole range of reasons, investment and thus the demand for credit were too low to guarantee adequate economic growth. Only enormously large government spending programmes - similar to those recommended by Keynes - would succeed in overcoming this weak growth. Unlike Friedman and von Hayek, the standard bearer of this analysis, Lawrence Summers, had real political influence: he was an adviser to the Obama administration and Secretary of the Treasury under Bill Clinton. The Biden administration's immense government spending after the pandemic reflected what Summers had already recommended after the great financial crisis. These government interventions gave the US strong economic growth and a budget deficit of over 6%, but also, in combination with the shocks of the pandemic, high inflation, which ultimately carried Trump to his second presidency.
The neoliberal paradigm that gained decisive political resonance in the 1980s and gained global acceptance in the mid-1990s, Chimerica or the Bretton Woods II monetary system based on it, has therefore been in a more or less open crisis for years. Whether the new mercantilism will one day actually characterise our era is still written in the stars.
In the past, such phases of upheaval (think of the 1970s, for example) have not led to an investment environment that is easy to navigate. However, there is some good news. Firstly, once we have recognised where we are, we can orientate ourselves and choose the path that promises success. Secondly, we are still in a globalised economic system and will remain so for some time to come, leaving room for manoeuvre not only for the USA, but also for China, Europe and basically all players.
Where do we set different priorities than our banking colleagues? We suspect that there is a relatively high probability that the economic slowdown expected a year ago could come as soon as Biden's stimulus programmes come to an end. Hopes of artificial intelligence as a driver for the entire economic system seem exaggerated in the short term. Inflation and thus interest rates could fall faster than is currently expected. The prerequisite for this is a weak US labour market and weak consumption. Couldn't Trump in particular, who wants to cut social benefits, make Americans more inclined to save? The Swiss National Bank already fears deflation rather than inflation; this could prove to be a beacon for the USA, Europe, China and the rest of the world in 2025. Bonds would then be a good investment, even in Switzerland. Gold, real estate and equities, which could benefit from European or Chinese stimulus programmes, would also be preferable. We remain loyal to our US positions, which have never featured so prominently in our strategies with a large franc bias. However, this outlook is not enough for us to be overweight in equities and we will take a more defensive and less cyclically sensitive approach to our alternative investments, which have a fairly large weighting of around 10% (excluding property).
We are looking forward to 2025 with anticipation and hope that the major economic blocs will find a sustainable mode for the next generation. We will gladly dedicate ourselves to the task of increasing the value of your savings even under these circumstances.
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Sources and directory
[1] What Trump's Global Order Could Look Like; Greg Jensen, Co-CIO of Brigdewater Associates, 19.12.2024.
Image sources: cover picture: UNSPLASH x GETTY IMAGES
