A New World Order on the Horizon

The world is changing. A new world order is emerging slowly in response to political and societal transformation, but is this something investors need to worry about? Read our five statements about why it is best to keep a cool head.  

Many investors are currently worried about the emergence of a new world order. It relates not only to geopolitical power, but also technological, social, environmental, and demographic trends. Soft power, or the attractiveness of shared values, also plays a role. Some examples include universal human rights, democracy, and the rule of law. The US and Europe have particularly benefited from the appeal of their soft power in post-war history. It is just as important for countries as "hard power," meaning military and economic resources.

Financial Markets: It is Important to Keep a Cool Head

The global impact of this development can hardly be underestimated. However, the stock exchange does not consider a new world order of this kind to be a foregone conclusion. Otherwise, public goods such as fresh water and biodiversity would probably have had scarcity pricing for a long time. Stock markets do look into the future. However, first of all their focus lies on fungible securities, and second on the months – and not years – ahead.

The current tensions relating to tariff policy and free trade are a serious, but probably only temporary, skirmish. This makes it all the more essential for investors to rely on a time-tested investment process. Here are five statements from the Investment Committee of Credit Suisse:

1. The Fundamental Stock Market Outlook Is Solid

Recent volatility in the financial markets is driven less by real economic developments and more by geopolitical "noise." Of course, one can lead to the other, and the situation must be considered carefully. However, to date the fundamental stock market outlook has been the light at the end of the tunnel, leading out of the darkness of the geopolitical to and fro.

2. Escalation in the Trade War between the US and China Is Unlikely

A trade war escalation would not be in the national interests of China and the US. Both countries have an overriding interest in a long-term trade relationship. The US wants a short-term negotiation victory, but China has a long-term strategy. This brings great advantages when making a deal, as those thinking of the long term may be willing to make brief concessions to cut the "Gordian knot."

3. There Is Room for Compromise That Will Benefit Domestic Policy

For the near future, the US wants to reduce its dependency on imports, and to gain better access to the huge Chinese consumer market. China is now strong enough economically to grant these wishes. It also wants to close its government-run operations that are harmful to the environment and often financially strapped – especially for aluminum and steel. Nor does China want to remain the largest foreign creditor of the US. The Central Bank of China owns eight percent of all US bonds. Reducing the amount would weaken the US dollar and boost the Chinese currency, which could well be in both parties' interests. While the US benefits from a weak dollar, China wants to have a key global currency in the long term.

Moderate credit spreads confirm that the pivot point has not yet come to the equity markets.

Burkhard Varnholt, CIO Credit Suisse (Switzerland) Ltd.

4. The Global Economy Is Still Growing

Let's go back to the encouraging economic figures. Positive yield curves in all key currencies indicate that synchronous growth continues. Both investment and consumer appetite remain high around the world. Unemployment is lower than it has been in a long time and inflation is within the comfort zone for monetary policy everywhere. The latest drop in the purchasing manager indices is more a sign of bottlenecks in a healthy economy than of lower consumer demand. The commodity markets are healthy, and monetary policy remains accommodative for economic growth.

5. No Inflection Point in Sight in the Equity Markets

The global corporate news is also better than increased concerns on the market would suggest. Equity risk premiums have risen despite solid earnings growth. In the US, the average earnings yield in the S&P 500 is 5.9%, with an average cost of borrowing at
3.9%. This promotes additional share buybacks. Moreover, this April companies around the world were set to pay out USD 400 billion in dividends – most of them being taken in shares and not in cash.

Moderate credit spreads also confirm that the equity markets have not yet seen the inflection point. Eight of nine historical equity market inflections were about six months behind widening credit spreads. A change of sentiment in technology stocks has also done little to change the above-average growth in this sector. Of course, their success has also given rise to counter-reactions. Higher taxes and stricter regulation are likely.