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Hopes and dangers

Inflation peaks, dollar peaks, interest rate peaks: like a rope of climbers, the markets, though frightened just a few weeks ago, are tasting the intoxication of the highs.

The Dax, followed by the Dow Jones officially emerged from the bear market, validating a 20% rise from their lows.

On the bond markets, dollar-denominated emerging bonds recorded their best performance since 1998 thanks to the decline in the greenback and the easing of health restrictions in China.

The last few months of the year carry the hopes of the next one. That of a soft landing of the Western economies. In the United States, bankruptcies are on the rise, with 2,000 per month now being recorded, but this figure is three times lower than in the last known period (2007-2008) when short rates reached 4%. In Europe, while industrial production is contracting, employment and corporate earnings remain resilient for the time being: one of the main challenges for managers in the services sector is to fill vacant positions. The political context is also reassuring: Giorgia Meloni’s fiscal restraint is on a par with the UK’s renewed fiscal discipline: who would have thought that the Italian Prime Minister’s first words would be directed at bond investors? Further east, the victorious counter-offensives in Ukraine have reinvigorated our faith in a democratic model capable of defending itself and uniting against those who do not respect international law. Finally, in China, the manifest exasperation of the population, finally heard by the authorities, is an encouraging sign.

The stock market is such that when it becomes reasonable to be optimistic, it can quickly become dangerous to be pessimistic.

Nevertheless, the signals of an end to overheating are not yet all in the green, especially in the United States. Wage growth and job creation continue to surprise forecasts, which reminds us that the challenge facing Jerome Powell remains. In the longer term, unfortunately, it is to be feared that the dangers that manifested themselves in 2022 will continue to haunt our outlook. Geopolitics, in particular, is likely to be among the major concerns.  

As Michael Howard laments in The Invention of Peace and the Return of War, “armed conflict between organized political groups has been the universal norm in human history. The temptation may thus be great to see in the events of 2022 and the declarations of intent (Taiwan and Turkey in Syria more recently) the return to this age-old state of opposition between nations. Fortunately, unlike the 20th century, the war is not total.
 
Russia has not (yet) used unconventional weapons. The United States does not want Ukraine to counterattack outside its borders, nor does it want Russian oil to find its way into international markets outside the EU and the G7. Nevertheless, the war is becoming multi-dimensional, constant and diffuse. Since Trump, it has been openly economic. Under Biden it is becoming technological. The widening of the technological gap with China is a priority, all the more so since the Russian debacle confirms the extent to which the supremacy of electronic warfare and intelligence is reshuffling the cards on the battlefield. So much the worse if one has to sacrifice one’s allies to achieve one’s goals…

Thus, when he announced that he would be talking to Emmanuel Macron about technology trade, it was because the Democrat intended to be followed by his allies in his “neo-containment” policy. The arsenal of this doctrine of technical domination is impressive… unless specially authorized: ban on exports from America to China of designs or semiconductors for high performance computing, supercomputers, and artificial intelligence applications; ban on American citizens working in this sector from collaborating with Chinese counterparts, ban on the sale of manufacturing units serving analog designs from the last 5 years and DRAM applications designed since 2017. In addition to the companies under its territorial jurisdiction, the Biden administration is summoning European companies such as ASML to stop exporting its most advanced machine tools to China, while at the same time it is unleashing a veritable war on industrial capital through the highly protectionist Inflation Reduction Act…

Torn by the ideological confrontation between the United States and the Russia-China-North Korea-Iran axis, Europe is alone in the front line of the energy war waged by Putin. It is not impossible that from this weakness, the old continent will emerge stronger by accelerating its energy transition and its independence in terms of defense. These are the wishes that we can formulate for the coming years. But the challenge is great. The world’s reserves of the metals needed for technological transition and innovation are limited. Access to them will probably be at the heart of the protean conflicts that unfortunately risk confirming Michael Howard’s theory.

Thomas Planell, Portfolio manager – analyst at DNCA. This article was finalised in December 2nd, 2022.

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