A panel during the Cross-Border Distribution Conference, organised by Deloitte and Elvinger Hoss Prussen with the support of FT Live on 16 May 2024, covered political and geopolitical risks and investment strategies to lessen the adverse impact from autocracies.

“Eurasia Group is in the business of forecasting political risk,” said panellist Rachel Gangji, head of global markets advisory at Eurasia Group. “We have a 60% probability that President Trump does come back to power.”

Can you “Trump-proof” your portfolio?

“Trade [and tariffs] is one area that Mr. Trump has been extremely stable in his view,” observed Gangji. She did not provide investment guidance but suggested it will have an impact on asset allocation towards China, emerging markets and to European companies. She also thinks that markets also await direction on government spending as well as on potential tax exemptions.

For panellist Yves Choueifaty, president and CIO at the asset management firm Tobam, the past provides a good indication about what could lie ahead in a second Trump administration.

Choueifaty : “There is a global recession on democracy”

“Any institute that studies democracies and autocracies will tell you that for about 20 years, democracy has receded… including in the USA,” said Choueifaty. Reassuringly, he believes that the US is very far from an autocratic regime.

“One of the downsides of democracy is that it’s difficult to predict. One of the advantages of autocracy is that it’s very easy to predict and it is going to get us into a catastrophe…. Even if you have the best and most clever leader,” stated Choueifaty. Looking at the matter from an investment perspective, he suggested that “you will potentially make money for years, but at the end, you lose everything, probably including your soul.”

“[Democracy] never chooses the best leader. It’s not about choosing the best leader. It’s about offering an environment with checks and balances…. it's about trying to implement a system that can weather the uncertainties,” said Choueifaty.

Should investment in China focus only on economics?

Questioned twice by the moderator, Yuri Bender, editor-in-chief, Professional Wealth Management, Financial Times on “China's moral approach to its minorities or its geopolitical orientation… and on the clampdown on certain sectors such as  education and technology… and the disappearance of Jack Ma, the Alibaba boss,” Jian (Helen) Liang, head of China market at the Banque Internationale à Luxembourg, elected to focus on the economic “big picture.”

She started by lessening the importance of foreign investors in the Chinese financial markets (equities and bonds), with their investments “accounting for less than 5% of the overall market cap in China.” Consequently, she argued that “the withdrawal of foreign investment from the Chinese financial markets is not a direct reason for the underperformance of the Chinese stock market.” Liang did not explain why foreign investors account for such a small percentage whereas their investments stood at 7.3% of the total A-share free float market cap on China's domestic equity market in 2019,  according to UBS.

Liang suggested that Chinese retail investors, accounting for 50% of domestic investors, may have borne a significant responsibility for the poor performance and the high volatility of the market as “they are not rational… maybe not good at investing.”

She also associated the poor performance to the “after effect of the covid measures [extended restrictions] in China.” Further, she thinks that her countrymen feel a sense of uncertainty about the future, compounded by a weak real estate market in the last three years as prices declined by 20% to 25% and sale volume dropped by 50%.

To be fair, Liang commented that quality education has become the reserve of the rich at the expense of “the normal working level people… that is the reason why the Chinese government cleaned up the private education market.”

China is back, or is it?

Returning from a recent business trip in China, Liang noted some signs of stabilisation, “a key word for Chinese economic development” in 2024. Referring to a UBS report, she reported that the bank is expecting 2024 to be a turning point in the real estate market. She also noted that signs of confidence by Chinese corporates are returning and they are getting prepared for US tariff hikes.

Liang sees opportunities for foreign investors parking their money into Chinese electric vehicle manufacturers and renewable energy producers going into Europe and the US to “localise their production lines.” She sees the development in these two sectors as offsetting “a little bit” the draw from the housing sector.

“Is China a friend or a foe for Europe?”

 “It will be hard for the EU to find a coherent China policy,” claimed Eurasia Group’s Gangji. She thinks that the EU will aim at maintaining a stable relationship with China while asking the latter for non-intervention in Russia’s war in Ukraine. More specifically, she expects member states to play the role of “good cops” on stable trade relationship while Ursula von der Leyen, president of the European Commission, will play the “bad cop pushing for potential additional tariffs.”

These tariffs are expected to reach 25% to 30% on Chinese EVs before July 2024. Gangji thinks the that the EU will need to manage the delicate balance between “not completely killing the climate agenda at the EU level” while “also supporting the European industries.”

Could China’s true goals be found in its actions?

Whereas Russia is running an economy of war, “the situation with China is more complex,” according to Choueifaty. He suggested that trading with China contributes to its military budget, which increased by 45% in five years. He noted that on some price-parity measures, China’s military budget is twice as big as that of its US counterpart.

The “classical definition of rationality…. should favour prosperity,” stated Choueifaty. He thinks that Germany lost the bet it took 20-30 years ago when it thought that trading with China and Russia would “help them to transition.“ The Helsinki Agreement in the 1970s adopted the opposite approach, he noted, commenting that when the Soviets turned to the US to get their wheat, the latter answered: “We don't trade with you. If you want us to trade with you, you need to improve your system.” He therefore argued that Germany’s unconditional trading approach enabled China and Russia “to finance their real ambition, which has nothing to do with prosperity.”

Observing the growing importance of German foreign direct investment into China, Liang suggested that Germany would not care much whether it trades with a democratic or a communist country, as long as it fuels its export-oriented economy. Moreover, she took comfort from a survey run by the German Chamber of Commerce in China, which found that 90% of German companies expect an economic stabilisation and have a positive view about their business in the country within the next five years.

Delano interprets that they ticked the right boxes in the survey to stay in the good graces of the Communist Party.

Which country had the best investment decade in the 20 th century?

It must be the US. Oder the German economic miracle, post WWII? Almost there.

An investigation by Choueifaty brought him to Germany between 1933 to 1943. He observed that Germany was, at the time, the number one partner of the US. “It was the paradise of short-sighted investors.” Germany was building everything and “at least they had a leader… and they knew where they were heading.” Yet going that investment route, “you would have lost everything.”

He noted that both leaders in China and Russia visited each other first when re-elected.  

“Do you want your portfolio to be exposed to that?” asked Choueifaty. He painted a sombre view of what is ahead for investors given the US and Europe are on a collision course with China. You may not have direct exposure to companies based in autocracies, but he estimates that 85% of listed companies in the western world have exposure to tyrannic regimes. We “have a huge exposure, all of us.” Not a relevant topic 10 years ago, he thinks that there are merits to construct a portfolio that exclude the tyranny risk factor.

This article was published for the Delano Finance newsletter, the weekly source for financial news in Luxembourg. Subscribe using this link.