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At a recent panel discussion hosted by a European chamber of commerce in Hong Kong, senior finance and investment professionals gathered to share their views on the global economic outlook, especially after the recent US elections. They talked about market volatility, geopolitical tensions, and the economic situation in China, comparing it to Japan's past struggles with stagnation and deflation.
Leveraging Defensive Investments to Mitigate Market Volatility, Swiss Equities Appealing
The discussion began with concerns about current market volatility, particularly around the US 10-year Treasury yield. There are worries about debt sustainability and the possibility of increased government spending under a Trump administration, leading to a cautious approach to investments.
"The last thing you want to see is the yield curve inverting in China."
This reflects a wider anxiety in financial markets, where uncertainty about fiscal policies can cause significant fluctuations. To handle this uncertainty, there was a preference for carry strategies instead of making directional bets. This allows investors to take advantage of market changes while avoiding excessive risk, which is crucial in unpredictable environments.
The importance of having a diversified portfolio was highlighted, with equities still being a major part. However, caution was advised, suggesting a shift towards defensive investments in sectors like healthcare and utilities, which are seen as undervalued and more stable in uncertain economic times. Despite a stronger Swiss franc, Swiss equities were pointed out as a particularly appealing investment option, reflecting confidence in their stability during global turmoil.
Optimising Financial Analysis Through AI Innovations, “Whole New World” Coming
Regarding the role of AI in tracking market movements and investment strategies, a nuanced view was shared regarding the current abilities of artificial intelligence in finance. While some are trying out AI for investment tracking, LLMs (large language models) currently face limitations in effectively handling numerical data.
"AI right now is not really that active in the financial market because it's not really designed to do that. Once the technology catches up with the financial data, then we enter a whole new world."
Still, there is optimism for the future, as significant investments are being made in AI technologies that could change the financial landscape. As these models improve, they are expected to enhance predictive abilities, allowing firms to create high-quality equity reports and recommendations at lower costs. The potential for AI to automate and improve financial analysis could significantly change how investment firms work, leading to better decision-making.
Furthermore, as AI technology advances, it is expected to work better with various data sources, enabling real-time analysis of market trends and investor sentiment. This could lead to quicker responses to market conditions and reshape the competitive landscape of financial services.
Russia’s Ongoing Assault on Ukraine: “Trump can’t end war in one day”
The discussion then moved to Russia’s ongoing assault on Ukraine, with the panel expressing doubt about a quick resolution. The complexities of US involvement were noted, suggesting that while Trump may promise to cut financial support for Ukraine, this doesn’t necessarily mean the fighting will stop. The defence of Ukraine was described as an existential issue for Europe, highlighting the ongoing geopolitical risks that are likely to impact global markets and investor sentiment.
"Trump does not have the power to end the war in Ukraine in one day. If he stops funding it; it would just turn a lot more messy and more complicated."
The long nature of the conflict has caused increased volatility in energy markets and has had ripple effects across various sectors of the global economy. The connection between the conflict and broader US-China relations was also discussed, as China’s support of Russia has worsened tensions with the West. Even if the war ends, the underlying geopolitical challenges, especially between the US and China, are likely to continue and complicate the global outlook.
"The broader impact of this war makes the US-China confrontation a lot worse and escalating faster."
Concerns were also raised about supply chains, especially in energy and agriculture, due to ongoing geopolitical instability in Eastern Europe. Sanctions on Russia and disruptions in supply routes have prompted countries to reassess their dependencies and look for diversification. This could lead to more investment in alternative energy and agricultural technologies as nations seek greater self-sufficiency amid geopolitical uncertainties.
China at Risk of Deflation: Japanification and Lessons from Japan's Past
As the conversation turned to China, worries emerged about the country possibly entering a deflationary cycle, drawing parallels to Japan's economic troubles in the 1990s. A recent Financial Times op-ed was mentioned, which suggested that the PBOC (People’s Bank of China) is trying to prevent yields from dropping too low, a sign of deeper economic issues that could shake investor confidence. The ongoing lowering of yields was seen as a warning that China might be at risk of a deflationary spiral.
"China’s economy has already become [like] Japan, and they're not going to be able to get out of it for years and years to come."
But China still has policy tools available to avoid such a situation. However, the effectiveness of those tools depends on the government’s willingness to act decisively. We are in a fragile economic landscape, where policymakers need to move quickly to stimulate growth without making problems in the housing market worse.
"There are some real structural challenges that China has to face... an extremely long, enduring decade period of correction and deleverage."
The discussion also highlighted structural challenges in China’s economy, such as high levels of corporate and household debt. These factors could lead to a balance sheet recession, similar to what happened in Japan. Even with fiscal support, if households and businesses are heavily in debt, it may not be enough to drive recovery. Furthermore, low consumption rates in China—currently around 35% of GDP—are a major barrier to sustainable economic growth. Without significant shifts in policy, China might struggle to boost domestic demand.
Urgent Policy Interventions Required to Stabilise China's Economy, Property Market Needs Fixing
The panel also discussed the broader structural challenges facing China’s economy. The government has significant policy tools but has been slow to use them effectively. The decision-making process within the Chinese government was described as “concerning”, suggesting that unless these structural issues are addressed, China could face a long period of economic stagnation.
"Without fixing the China property market... you will never see the Chinese equity market do well."
Stabilising the property market would be a crucial first step for economic recovery. Without fixing the property market, the Chinese equity market is unlikely to perform well, due to the interconnectedness of various sectors within the economy. Therefore, proactive measures to stimulate demand and restore confidence in the property market are needed.
"If the CCP wanted to stimulate private consumption, it would have to start privatising... and if the CCP starts to privatise, it ceases to become the CCP."
The potential Japanification of China could have implications beyond its borders, affecting global trade and investment trends. As China faces a prolonged period of economic adjustment, countries that heavily rely on Chinese imports may need to rethink their supply chain strategies. This could lead to a reshaping of global trade networks as nations seek to diversify their sources of goods and raw materials.
Global Cooperation Essential for Addressing Economic Risks
Towards the end of the panel discussion, the importance of international cooperation in addressing these complex challenges was underscored. Global issues like climate change, technological advancement, and economic stability cannot be tackled alone. Countries need to work together to create frameworks that promote sustainable growth and manage risks, with collaborative policy approaches.
The ongoing geopolitical tensions, especially between the US and China, highlight the necessity for dialogue and negotiation. As nations work through their respective challenges, fostering communication and understanding will be crucial in preventing further escalation and promoting stability in the global economy. It was agreed that while the road ahead may be difficult, proactive engagement and cooperation could lead to a more resilient and interconnected world.
Risks of Stagnation Amid Geopolitical Instability, Uncertain Economic Path of China
The panel highlighted the complexities of the current economic environment, influenced by political dynamics in the US, ongoing geopolitical tensions, and the uncertain economic path of China. The potential for a prolonged period of economic adjustment, particularly for China, raises significant implications for global markets.
"Even if this Ukraine war somehow miraculously ends, I doubt that would lead to too much improvement... because this US-China confrontation will persist."
Investors and policymakers will need to navigate a landscape marked by volatility, changing policies, and ongoing structural challenges that could redefine traditional economic models in the coming years.
In conclusion, the 2025 economic outlook remains uncertain, filled with potential risks and opportunities. The relationship between domestic policies and international relations will play a crucial role in shaping future economic paths. Stakeholders in the global economy must stay alert, adaptable, and cooperative in tackling the challenges ahead. Lessons learned from the past, particularly from Japan's experience, will be vital, if applied prudently and swiftly, in guiding China and other nations toward sustainable growth in a complex world.
*The speakers were not named, as it was a Chatham House Rule discussion.
Disclaimer: Whilst every effort has been made to ensure the accuracy of this article it is general in nature and does not constitute legal advice of any kind. You should seek your own personal legal advice before taking legal action. We accept no liability whatsoever for loss arising out of the use or misuse of this article.
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