A new world order? US elections and their global implications

Vontobel recently hosted Ann-Katrin Petersen, Black Rock Investment Institute’s Chief Investment Strategist for the Germany, Austria, and Switzerland region, Martin Naville, former CEO of the Swiss-American Chamber of Commerce, Stephan Bierling, professor of political science at the University of Regensburg, and Dan Scott, head of Vontobel Multi Asset, for an internal panel discussion that I moderated on the upcoming US presidential election and what its potential outcomes might mean for the world. Here are my key takeaways.

Note: This article reflects the views of our guest speakers and are reported below under the Chatham House Rule. It does NOT express any political views or endorsements, but rather aims to objectively analyze the economic factors and implications in play during this election season. It is for informational purposes only and should not be construed as investment or political advice. 

As the US approaches its pivotal elections, the global geopolitical landscape remains fraught with uncertainty. The result of the US presidential election – a race between former President Donald Trump and Vice President Kamala Harris – comes with potential implications that extend far beyond US borders. Our guest speakers commented on whether – and how – these changes could impact various aspects of governance and policy.

One speaker began by highlighting that, despite negative media coverage, the underlying strength of the US economy and its political institutions remains intact. The panelist predicted a Senate shift from a 50-50 Democratic-Republican split to a Republican majority, while the House could move from a narrow Republican majority to a slim Democratic lead. When asked about the presidential race, one panelist pointed to the uncertainty surrounding Harris's policies and how that contrasts sharply with the well-known, albeit controversial, stance of Trump.

There was a divide in opinion on the significance of the election’s results. One speaker emphasized that it doesn’t make a huge difference on a larger scale whether the Republicans or Democrats win. In contrast, another speaker countered that the implications of these elections are considerable, calling it arguably the most important election in our lifetime, as the candidate that wins the White House is poised to make a difference for US democracy, European companies, and may influence the cohesiveness of western alliances. Even so, our guest speakers agreed that pressure on Europe to step up in contributing to its own security is likely to increase no matter who will become the next president.

Domestically, the fiscal outlook in the US remains challenging regardless of the election outcome. With public debt expected to rise from the current 123 percent of gross domestic product (GDP) to nearly 170 percent of GDP forecast by the Congressional Budget Office by 2054 , the panelists agreed that we’re likely to see a similar trajectory under both political parties. While this would support stimulus to the economy, it would also reinforce persistent inflationary pressures. The high debt levels and potential sunsetting of tax cuts are likely to be a topic for investors as potential drags on the economy. The tenor among most of our guests was that one potential advantage of a divided Congress would be that Republicans likely wouldn’t be able to pass all the tax cuts they desire, and Democrats wouldn’t be able to wave through all the spending programs and additional policies they want.

Markets are likely to respond to these uncertainties with increased volatility. But, as the panelists unanimously pointed out, the world in general has become more unpredictable, along with an unusual macroeconomic backdrop. The combination of a dampened growth environment, elevated cost pressures, higher rates, and elevated debt makes excess returns over cash appear likely to be more muted than in the pre-pandemic era, which is why two speakers said investors need to look out more for alpha opportunities as volatility comes with more dispersion of returns in the markets, which enables skilled active managers to seek such opportunities.

This geopolitical and macroeconomic changes towards a potential new world order calls for a dynamic approach in strategic asset allocation and good diversification across asset classes, another panelist noted, adding that gold and liquid alternatives can help to diversify portfolios while still capturing returns. And while US equities have surged this year, it’s possible investors might be tempted to take profits going into the election.

This environment also calls for investors to become more dynamic and active, and to consider structural forces that transcend the macroeconomic backdrop, like geopolitical changes and fragmentation, the race to build up AI, or the low-carbon transition. Some of the longer-term topics mentioned that will likely influence strategic asset allocation include slowbalization, with countries operating between G-7 countries and the rest, and international trade. This indicates that there are many other important factors at play, though we simply didn’t have enough time to zoom in on them during the panel discussion.

So, for now, as the US election draws closer, the global investment community is poised to keep a close eye on the developments. As some of our panel emphasized, the potential outcome could reshape both US domestic policy and international relations. While uncertainty persists, focusing on strategic investment approaches and understanding the broader economic and geopolitical implications will be crucial in this evolving landscape.

And one piece of advice by two of our guest speakers summed it up perfectly: “Ignore the noise, focus on the long term.” I couldn’t agree more.

1. Source: International Monetary Fund https://www.imf.org/external/datamapper/GGXWDG_NGDP@WEO/OEMDC/ADVEC/WEOWORL

2. Source: Congressional Budget Office https://www.cbo.gov/publication/60127#_idTextAnchor001