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An investment theme, or an investment framework is the result of solving a jigsaw puzzle. Such a framework often begins with an idea that grows when one keeps questioning what is happening, or what might occur, until everything suddenly makes sense. The objective of this text is not to provide answers but to ask questions. It hopes to outline an idea which could set up the investment framework for the new decade.
No empire lasts forever
During the 20th century, Europe tore itself apart by being at the centre of two world wars. The creation of the European Union was an attempt to regain its former leadership position, but many difficulties stood in its way. Although the EU has made significant progress since its beginnings, we cannot help but wonder whether Europe will lead again anytime soon. The US took over the leadership position from Europe by positioning itself in the post-war power-vacuum. It subsequently flourished and became the only superpower in the world.
One of the major questions today is “will the US be able to keep its hegemony?” “ Ever since president Trump started the trade war with China, the ‘Clash of Empires’1 between the US and China has been a recurrent theme in our discussions with clients. Trump has accused China of being a currency manipulator, and currencies obviously play an important role in global trade.
Let’s dive a little deeper into the history behind this clash. In 2015, a large European bank was sentenced to five years’ probation by a U.S. judge in connection with a record USD 8.9 billion settlement to resolve claims of violating American sanctions against Sudan, Cuba and Iran. It was at that exact moment that the US ‘weaponised’ the US dollar, effectively pointing at three parties in a deal that involved the US dollar as a currency (buyer, seller, United States). In doing so, the United States applied American domestic laws to an international transaction, solely based on the fact that the transaction involved US dollars. At that point, many countries and companies understood that they needed to be more vigilant. For some countries, this also meant they had to rethink how to perform financial transactions. Was this the beginning of the end of the US’ hegemony?
The current US administration’s conflict with China goes further than just trade. As mentioned before, it is also about technology. China is making significant progress in this field, focusing on several cutting edge developments like 5G, AI, the RMB crypto currency or quantum computing. The US was able to block ZTE, but will it be as successful in destroying Huawei as well? The tech battlefield is becoming increasingly important, as it also impacts military strength.
It is fair to say that the US seems more aggressive under the Trump presidency. However, his Chinese adversary Xi Jinping is in many ways also very different from his predecessor Hu Jintao. Xi has positioned himself as China’s strongman and is determined to put China on the map, not only as an economic powerhouse (which Hu Jintao already achieved), but also as a political and military superpower. Will tensions abate taking into account Xi’s determination and Trump’s eagerness to remain president for another four years?
Has the current US administration accelerated the rise of China?
The last couple of years, the US has not really shown a lot of strength overseas either. During his first weeks in office, Trump torpedoed the Trans-Pacific Partnership or TPP, an effort by president Obama to limit China’s power in Asia. Instead, Trump focused on bi-lateral agreements that proved to be very time consuming and of little benefit for now. The US did not step in in Syria after the atrocities. Before that, Russia was only sanctioned when they annexed Crimea. Once considered the policeman of the world, the US now finds it too costly to intervene internationally. Is the US losing its global political hold?
China, however, is slowly but surely increasing its international economic and political influence. China has been building military bases on the Seikaku islands to protect its borders. It has increased its influence over Hong Kong sooner than foreseen. Most importantly, China rolled out the Belt & Road Initiative to build infrastructure throughout Asia, Eurasia, Africa and Eastern Europe. It has been providing loans while taking in USD cash flows. Did you know that China now exports more to ‘Belt & Road’ countries like Pakistan, Indonesia etc. than to the US? Is China winning without fighting in accordance with Confucian doctrine? What if, in a couple of years, the US ends up needing China more than China needs the US? The railroads running from Beijing to Europe will cut travel time and costs in half. Is Beijing becoming the ruler of the land while the US rules the seas? As the US is becoming more inward-looking, China actively tries to become the new global player.
Even at home, the US administration seems to be losing control as well. Contrary to areas like South Korea, Singapore and Hong Kong, the United States’ reaction to the Covid-19 outbreak was belated. No less than 40 million unemployed US citizens now live on checks which, unless extended, will expire in July. The killing of George Floyd has led to mass protests, the likes of which we have not witnessed since 1968. Will Trump be re-elected given this slew of unsuccessful developments? Will another four years of a Trump presidency accelerate the downfall of the US’ hegemony? Can Joe Biden and his successor prolong US dominance and promote democracy and freedom? It does not seem too late yet, but the clock is ticking. While US companies are still leaders in their field, and firms like SpaceX show the strength of US technology, political influence is waning.
One by one, the pieces of the puzzle will be revealed and investments will be made accordingly. Will Asia have a more prominent role in portfolios? It likely will, but the pace at which it replaces the US will also depend on the unravelling of the international framework.
1Title of a book by Gavekal