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Investing in a fractured world – currencies, safe havens and alternative investments
“How should we invest in a fractured world?”
That was the question posed by Dr. Nannette Hechler-Fayd’herbe, Head of Investment Strategy, Sustainability and Research and CIO of EMEA at Lombard Odier, at a prestigious event to mark a year since the opening of Lombard Odier’s Verbier office.
Hosted by Stéphane Pedraja, Lombard Odier Partner and Director of the Lausanne, Vevey, Fribourg and Verbier offices, the evening brought together guests and prominent speakers from a wide variety of disciplines, including finance, journalism, and the luxury Swiss watch industry. History emerged as a key theme, as attendees explored how lessons from the past can help investors navigate a world riven by new and widening geopolitical divisions.
Learning from history
“The headline”, Dr Nannette Hechler-Fayd’herbe began, “is that the world is indeed fractured. But this did not begin with the wars in Ukraine and the Middle East. Today’s splits began seven years ago with then President Trump’s trade tariff war.”
These splits, she explained, have since been exacerbated by conflicts and rising tensions around the world, such as between Taiwan and mainland China and between North and South Korea. The lesson of history, she said, is that, “When countries no longer trust each other, international trade is the first to be impacted. Quickly, you trade only with your friends – not just trade in goods, but also financial flows. A fractured world has far-reaching consequences for the economy and investment.”
Since Donald Trump’s term as US President, she noted, international trade has undergone a fundamental reorganisation. US imports have shifted away from China (falling from 22% of all imports to just 15%) and towards allies such as Canada, Mexico and the European Union. In turn, smaller nations are increasingly being forced to choose between the world’s two largest economies, further exacerbating the geopolitical split.
Despite recent outbreaks of war, and rising tensions between superpowers, Dr Hechler-Fayd’herbe gave investors cause for reassurance. Highlighting research from Dario Caldara and Matteo Iacoviello, both members of the Board of Governors of the US Federal Reserve System, she explained that, although today’s upheaval gives reason to be cautious, when compared with the past hundred years, geopolitical risks remain “under control”. Taking the longer view, she noted, numerous hot and cold war events – from global conflicts to the September 11th attacks on New York – had put societies and economies into a significantly more perilous position.
From risk to opportunity – parallels across disciplines
Jean-Philippe Jutzi, journalist and former diplomatic counsel, and Chairman of the Verbier Historical Association, used the town of Verbier itself as an example of how even the worst geopolitical divisions, whilst creating risk, can also offer new opportunities. During the 1940s, he explained, as global conflict prevented free movement, the town of Verbier saw huge expansion as a destination for Swiss holidaymakers. Careful investment in property and infrastructure has since seen Verbier became one of the world’s most exclusive resorts.
Jean-Claude Biver, President of luxury Swiss watchmaker JCBiver and former CEO of TAG Heuer and Hublot, looked back still further for another example of political fractures creating unexpected financial opportunity. The Swiss watchmaking industry, he said, owes its birth to religious persecution, when Protestant Huguenots fled a hostile government in 16th century France. Bringing with them watchmaking expertise, the immigrant Huguenots settled in the Jura region of northern Switzerland, where they were quick to employ the local population in making some of the world’s earliest wrist and pocket watches. Born out of conflict and persecution, Swiss watchmaking, like the town of Verbier, has since become a global leader.
For investors willing to adapt to the times, Dr Hechler-Fayd’herbe added, today’s geopolitical risks have, similarly, brought new opportunities. So-called “safe haven” currencies, the traditional refuge in times of crisis, have benefitted, but so too have alternative investments such as commodities and hedge funds. As investors face an uncertain world, flexibility is essential, she noted.
What it means for investors today
As long as geopolitical risks remain heightened, safe haven currencies will see continued strength, Dr Hechler-Fayd’herbe said. While the US dollar may “see some fluctuations over the next three to twelve months, we expect a strong dollar to continue. The Swiss franc, which has been a super-currency in relation to the rest of the world, has fallen a little from recent highs but its fundamental strength remains.”
Historically, she continued, “global fractures are accompanied by inflation shocks. But the good news for us in this fractured and conflicted world is that this inflation is now coming down.”
Highlighting the elevated interest rates adopted by many central banks as a means to tame inflation, Dr Hechler-Fayd’herbe said that with markets anticipating falling rates, “investors must attach importance to bonds – we need to take advantage of current rates.”
Following a recent rally in global equities, led by the US, she continued, “2024 is a year in which you need to maintain exposure to equities, but you must stay at strategic levels, do not be overexposed. Take advantage of the balance offered by allocations to cash and bonds, and deploy alternatives such as hedge funds.”
Looking further ahead
Concluding, Dr Hechler-Fayd’herbe turned to another key lesson from history. “Politics always has a major impact on the economy,” she said. “This is a very important election year. There are many possible sources of volatility. Interest rates will reflect these uncertainties in the future.”
“The US elections in particular often have a major impact on investment. What would happen if Trump won? Maybe we’d see more tariffs, or another tariff war. Maybe we’d see lower taxes or more aggressive migration policies. You can imagine that the US job market might see pay rise. We could see a questioning of US support for NATO or Ukraine. There could even be a risk to the provisions of the US Inflation Reduction Act.”
Host Stéphane Pedraja picked up on the importance of politics. For investors, he said, “the political world plays a central role. Friendship between business and politics is fundamental. Our development in Verbier is based on the Swiss brand – international flexibility and proximity to our clients and the political world. Personal relationships and trust are at the heart of our wealth management convictions.”
As Lombard Odier celebrates a first full year in business in Verbier, we build on more than 225 years of private banking history, learning from the past in order to rethink the world around us. In a fractured and fracturing landscape, with global growth slowing, climate change worsening and the conflict threat elevated, we stay close to our clients, helping them navigate through today’s uncertainty by offering a fresh investment perspective.
While geopolitics may occupy today’s headlines, we are convinced that the transition to a sustainable, nature-positive economy is creating both the most long-term risk and the greatest opportunity for today’s investors. We believe that sustainable investments are no longer a ‘nice-to-have’ but a ‘must-have’ to ensure our clients’ wealth is preserved and protected for generation after generation. As our presence in Verbier strengthens, we ensure that our bankers remain close to their clients and the decision-makers who shape the investment landscape.
Important information
This document is issued by Bank Lombard Odier & Co Ltd or an entity of the Group (hereinafter “Lombard Odier”). It is not intended for distribution, publication, or use in any jurisdiction where such distribution, publication, or use would be unlawful, nor is it aimed at any person or entity to whom it would be unlawful to address such a document. This document was not prepared by the Financial Research Department of Lombard Odier.
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