An ongoing U.S.-China trade war may well extend the former expansion cycle but Julius Baer stresses that the demise of the dollar is inevitable and that prepares should brace themselves for a bipolar world co-dominated by the latter superpower.
Julius Baer’s chief investment officer Yves Bonzon highlighted three key points that investors should take note of moving forward in light of tensions between the world’s two largest economies.
Firstly, Bonzon cautions against trading based on political developments.
«It is extremely dangerous and tricky to trade such political news flow because it can flip one way or another very abruptly,» he said. «As an investor, you can be completed wrong-footed in no time.»
Secondly, he stressed that whilst the trade war may have prolonged the U.S. expansion cycle, it is likely to only delay the expiry of its bull market – the longest recorded in history – but not boost asset prices which increases risk premia.
Bipolar World
Bonzon's third key point was about the post-conflict outcome between the U.S. and China, which he believes will result in a bipolar world by 2030. He believes that the two major nation states will decouple on all major fronts with separate economic cycles, financial cycles and even technology ecosystems.
«The fundamental beta of the two markets will be independent,» he explained. «[This will mark] the great return of international diversification where investors will need to build a more robust portfolio by holding both rather than one or the other.»
One of the key drivers that will lead to the demise of the U.S. dollar regime is its political tendency to weaponize the currency for political means, such as recent decisions to restrict Chinese companies’ access to its capital markets.
«Slowly but surely [the U.S.] is cutting the branch they are sitting on,» Bonzon concluded. «But the world will adapt and people will reposition themselves and allocate capital in a way the protects them against unilateral decisions by the U.S. Chinese renminbi bonds might be considered as good collateral as the U.S. Treasury [in the future].»
