Everyone first?

Arno Lawrenz, Head of Fixed Income Portfolio Management at Ashburton Investments.

It has become readily apparent that Donald Trump really did mean it when he spoke about “America First” in his electoral campaign of 2016. His executive decisions since assuming office are tinged with what to some appear to be a rather protectionist approach, although the accuracy of that assessment would still be too early to call at this stage, as we still need to see how things actually change. Nonetheless, there is no doubting the intent behind these initial policy decisions – he intends to place the USA’s sovereign interests at the centre of the policy making processes.

At the same time, across the Atlantic, many of the USA’s erstwhile European allies are undergoing deep introspection regarding their place in the world. The UK we already know has voted to leave the EU, a stinging rebuke of the politics of mutual collaboration. A vote, essentially, for Britain First.

Currently, in France, as the 2017 Presidential elections draws nearer, one of the candidates favoured to win through to the 2nd round is Marine Le Pen, leader of the National Front, whose policy focus is deeply populist and nationalist. Le Pen has already stated that should she win, she will campaign for France will leave the EU as well.

In Italy, despite the usual unpredictable nature of their internal politics, current dynamics point towards more coalition government, with a possible outcome being the current largest opposition party, the Five Star Movement, an anti-EU protagonist, being in the position of being able to nominate the Prime Minister. At the same time, the Italian banking system is teetering on the edge, a development which will invade the hopes and dreams of the middle class electorate. Populist policies will no doubt be the result. Whatever the outcome, it is clear that the future of Italian politics will have a strongly anti-Euro sentiment.

In Greece we already know the story – weighed down by debt, a deep economic recession and a bank system still unsustainable means almost the inevitable – at some point Greece (or the EU itself) will have to decide whether they want in or out. If they stay in, the rest of the EU will have to foot the bill. With the current […]-First approach (you fill the country gap) flourishing, that fact alone will have other EU members baulking at best.

In Germany, fortunately, Angela Merkel and her coalition seem to retain the upper hand in preparation for September elections, where policy is decidedly pro-Euro. Germany though, dominates the Eurozone, and with the uncertainties around the future of the EU, the Euro remains rather weak, and that does no harm to German exports, so current uncertainties, in the short term at least, are in Germany’s economic interests.

Increasingly then, as the past political paradigms are questioned and redrawn, the focus appears to be one of national self-interest. In the US this means that old global relationships are being re-evaluated, and perhaps will resume normal course going forward. But the possibility that the political power lines could be redrawn certainly causes some concern for the Old Order.

When it comes to China, the US has increasingly recognised that their sphere of influence is on the rise, as witnessed recently at Davos. Much of the US’s attention will be devoted to finding a way to contain Chinese influence on the global geopolitical discourse. Trump’s “friendship” with Vladimir Putin should be seen in this light: From a Russian perspective, they are increasingly aware that from a demographic perspective, far Eastern Russia, including Siberia, is increasingly becoming ethnically Chinese. That region still remains one of the most sparsely populated regions in the world, but richly endowed with natural resources. Just to the south is the one and a half billion densely populated Chinese, hungry for resources. Sino-Russian relations remain deeply conflicted and complex from this perspective. It was not that long ago that Chinese claims over vast swathes of Russian territory were denied. Would China attempt to do a Russian Crimea plan? Granted, a fairly low probability in the short term, but as the region becomes more ethnically Chinese, we know that politics follow demographics. So don’t underestimate how much it worries the Russians.

Trump’s plan would appear to be that in order to contain Chinese geopolitical influence, the US would increasingly overlook Russian fault lines in Europe and the Middle East, in favour of developing some form of loose political alliance against such Chinese influence. There is nothing the Chinese would be more irritated with and perhaps even fear, than having another US ally on their doorstep to the north, and Trump appears to be one step ahead of China in this regard.

What then for investors? The problem here for investment markets is that while these power-lines and paradigms are being redrawn, their intentions and economic outcomes are increasingly uncertain. We highlight then, that in the short to medium term, the following risks will be elevated :

- The very existence of the Eurozone will come under scrutiny, leading to Euro weakness.
- Greater political collaboration between US and Russia would be very good for US oil interests
- Chinese response to US-Russia developments would be increasingly militaristic, leading to bouts of global “risk-off” events. Good for safe haven assets like US Treasuries, bad for global equities.

In the meantime, it has become clear that markets themselves will be increasingly influenced by the geopolitical influences and policy shifts, and less by the current economic climate. This is an important phase which will require longer term investors to have clarity in their investment objectives, and not be swayed by the usual short term economic fluctuations.