“If we had to sum up our vision, it would be with three Gs: geology, geography and geopolitics,” said Christopher Dembik, senior investment advisor at Pictet Asset Management. Dembik shared his views on the year ahead during a presentation in Kirchberg on 30 January.
The year 2024 is an “important year of elections,” said Dembik, touching on the geopolitical aspect of the three Gs, and “a year of localised geopolitical risk,” with tension points between China and the Philippines; India, Pakistan and Bangladesh; conflict in the Middle East and around the Red Sea; and Russia’s war in Ukraine.
“Metallic nationalism”
Geology refers to “metallic nationalism,” said Dembik. There are certain countries that have rare earths and industrial metals used in batteries and technological devices--and these countries “understand perfectly” the type of resources they’re sitting on. They’re able to decide to whom they wish to export these rare earths and metals.
But there’s too much focus on rare earths, he added. Gallium and germanium, for instance, are industrial metals used to make semiconductors and wind turbines. China, a key producer of gallium and germanium, decided in August 2023 to implement export restrictions on these metals; Indonesia’s government in October said that it planned to ban exports of tin, a metal needed for the energy transition.
So does this put Europe’s shift to renewable energies at risk? Not necessarily. For Europe, “it’s a change in direction,” said Dembik. Europe will need to put more focus on recycling instead, and develop this in the years to come.
Geography: what was considered to be “sure,” no longer is
On the topic of geography, continued Dembik, a major shift is that commercial routes that were once considered “sure” no longer are as reliable as they once were. “For us, the integrality of maritime routes are today in danger, either for geopolitical reasons or due to climate change.” Red Sea shipping routes are being affected by attacks, for example, while drought has caused lower water levels in the Panama Canal. These are having an impact on globalisation as we know it.
On the other hand, globalisation is taking place along the Istanbul-Jakarta axis, but without the western world, noted Dembik. “We’re very interested in what’s happening in this zone of southern Asia for a simple reason: if you draw a line between Istanbul and Jakarta, you have 3.5bn people. The population is growing by an average of 1% per year, and its revenue growth is among the highest in the world.”
We’re in a financial and monetary system that will be more multi-polar
This region is “pertinent” because there is an abundance of investment, infrastructure and trade deals happening. “But this economic integration is happening without Westerners,” he argued. “For the first time, in this geographic zone--which includes India and Indonesia--there are more loans in yuan than in dollar.”
“But this doesn’t mean that we think we’re in a de-dollarisation of the economy,” Dembik said. “Instead, we’re in a financial and monetary system that will be more multi-polar, something that we see as good news. Reduced dependence on the dollar means that we didn’t see an emerging country crisis, because they were able to borrow money under better conditions, in local currencies.”
US recession “improbable” in next 12 months
Besides the three Gs, Dembik also discussed his expectations for monetary policy in Europe and the US. “The decrease in rates, for us, in the United States, will be very, very measured,” he said. “Our vision for this year is 50 to 75 basis points of cuts.” And despite not having a “crystal ball,” Dembik said that “it is improbable to have a recession in the US in the next 12 months.” Growth will be “sluggish,” but it will be there.
“Just looking at the US from a macroeconomic perspective, it isn’t even necessary to cut rates. But rates will be decreased, because the real estate market will need to be supported--which is the weak point today,” argued Dembik. “The economy is very resilient.”
“Afraid” that ECB will cut too late
At the European Central Bank’s governing council , it decided to keep its interest rates the same--4.5% for the main refinancing operations rate. When will the ECB start to cut?
For Dembik, his “biggest worry for the European Central Bank is that it will focus on the wrong statistics. Clearly, the ECB is looking at salary increases… But salary increase expectation is a lagging indicator that is usually revised downward. The ECB is afraid that we will have higher inflation relative to salaries, and we don’t see that. We don’t think that at all.”
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Companies understand that this year will be a bit more challenging, and while they also understand that that they need to keep investing, they don’t want to increase salaries, especially when inflation is starting to come down, he explained.
“So, I’m afraid that the ECB will start cutting too late. And since they will start cutting too late, they will cut too much--like they have done when they hiked interest rates--and it will have a negative impact on the economy.”
In a “perfect world,” the ECB “should cut interest rates from March,” said Dembik. “I doubt they will cut, but they should do it.”
“Competitive advantage” to cut first
One of the ECB’s biggest fears is “probably” that they don’t want to cut before the Fed, Dembik added. “But if you look back over the past nine cutting cycles--of course, it was not the ECB, but let’s take [Germany’s] Bundesbank as a replacement--eight times, it was the Fed that started to cut; only once, it was the Bundesbank.”
“We follow basically what the US is doing, but this is not good, because we know--in terms of monetary policy--when you are the first one to cut interest rates or to increase interest rates, you will get a competitive advantage, because you will attract inflow of capital very fast. Basically, what’s going to happen: the US will cut, they will attract inflow of capital--they have already attracted a lot, but it will increase,” said Dembik. “That’s why, I would say at the bottom of your investment portfolio, you need to have US stocks, and you need to have the tech stocks, no matter the current valuation.”
Need “clear industrial policy” in Europe
And what about European stocks?
The main trends are in green energy and tech, but the flow of capital is going to the US, said Dembik. “I was recently in Madrid, and when you discuss with the stock market there, you see that there is basically no liquidity, that you don’t have investors. One or two years ago, the Spanish stock market wanted to launch an AI index--the first one in Europe--and nothing has happened because they don’t manage to find investors, even on something that is very trendy.”
“Which European country was the first one that decided to have a global investment policy on AI?” asked Dembik. “France. In 2017. Six years after, nothing has been done.” Some “local hubs,” such as Grenoble, have been established, but startups are not getting loans and sufficient access to venture capital.
When you’re not ready to pay talented professionals enough, how can you blame them after for going to the US?
“We have not managed to create any large-scale startup in technology--not only in AI, but any other sectors--at the European level,” he said. There’s no strategy. “What we need is to have a very clear, industrial policy. Then, we can make choices. The US has made choices: they decided to invest mostly in semiconductors first; probably they will then decide to move on to something else.”
“Very pessimistic” on European tech companies
“You need to have clear political involvement,” said Dembik. “When you’re not ready to pay talented professionals enough, how can you blame them after for going to the US? I’m very pessimistic on tech companies in the European Union. You have some small, medium-sized companies that are interesting, especially in the green transition. But at the end of the day, once they do their IPO, they don’t have any flow of capital, any investors that decide to invest.” They remain small-caps and don’t get access to financing.
“When the last achievement of the European Union in terms of technology was Airbus, I guess it shows quite well that we’re missing something,” said Dembik, who added, however, that he “would love not to be pessimistic.”
Is it a question of financial resources? No. For Dembik, “it’s a matter of priority.” Artificial intelligence projects are “long-term.” The US, for instance, has collaboration between the public and private sectors, something “that implies a higher level of success,” and also invests a lot into fundamental research. It’s not the case in Europe. “You need to invest in the long run.”