The Midterm Elections—and Their Significance for European Investors
The U.S. midterm elections will also be a vote on the “Trump system.” But the change that this policy represents extends far beyond a single administration. New power blocs are changing the rules of the economic game—and with them, the fundamentals of investing.
On November 3, the United States will elect a new Congress. All eyes are on the majority breakdowns in the House of Representatives and the Senate. How much support does Donald Trump have? How much leeway will his administration have over the next two years?
These questions are important. However, to understand the significance of the midterms, you have to look at them in a broader context.
The world is undergoing a fundamental transformation. The global, rules-based order is losing its binding force. It is being replaced by a world in which political allegiances, strategic dependencies, and the ability to assert one’s own interests carry greater weight. At the heart of this development lies the power struggle between the United States and China.
Midterms are one of the events that can either accelerate or slow down this process. The underlying causes run deeper.
The U.S. is reshaping its own system
For decades, the United States has used its political, economic, and military power to establish and safeguard a global order. Open markets, international institutions, and the cross-border division of labor were essential components of this system.
From our perspective, the United States is increasingly using its power today to reshape this order in line with its changing interests. Maintaining its own strategic superiority is becoming more important than the openness of the system as a whole.
Much of what appears contradictory or chaotic from a European perspective can be understood, against this backdrop, as part of a larger strategy. That does not mean that every single measure will be successful. There can be significant differences between strategic intent and tactical implementation.
Nevertheless, the direction is clear: The U.S. wants to leverage its economic, technological, and security strengths to secure its position vis-à-vis China. Even a change in the majority in Congress would not resolve this fundamental conflict of interests.
New groups form based on shared interests
The new world order cannot simply be mapped out on a map. Its boundaries arise from economic integration, security ties, and sociopolitical ideals.
One possible model is a more closely integrated American Hemisphere: raw materials, industrial processing, energy supply, and markets would be organized more effectively within a common strategic space. The United States could act simultaneously as both an economic hub and a protective power.
This is a scenario whose implementation depends on numerous political decisions. However, it illustrates how the logic of economic cooperation could change. It would become increasingly crucial to determine which partners provide supplies, security, and political support.
Existing trade relations will remain in effect. Economic ties do not disappear simply because of a change in government. Political alignment and economic dependence can point in different directions. It is precisely this that gives rise to tensions that are likely to shape the transition.
Europe's economic clout alone is not enough
For Europe, this development raises a particularly difficult question: How much influence can actually be derived from economic size?
A large share of global trade does not necessarily equate to political or military clout. Europe may see itself as a center of power on equal footing with the United States and China. Whether it is treated as such by both of them depends on how independently it can act and how effectively it can represent its interests.
For European companies and investors, this distinction has concrete consequences. Access to a market, the availability of energy, or the security of a supply chain may depend more heavily on political decisions. An economically sound connection is therefore not necessarily a connection that is secured for the long term.
Anyone assessing Europe’s prospects must therefore take into account not only growth and competitiveness but also its strategic dependencies.
When Strategic Security Takes Precedence Over Economic Efficiency
In the globalization that has taken place so far, cost efficiency has been a key organizational principle. Production took place where conditions were particularly favorable. Supply chains connected locations across political borders.
In a world of competing blocs, these considerations take on added significance. How reliable is a supplier in the event of a conflict? Will a technology remain available? Can a country access raw materials and industrial capacity when it urgently needs them?
As these issues gain importance, government influence over economic decisions also grows. Investments can be directed toward areas where capacity is needed for strategic reasons—even if establishing that capacity is initially more expensive.
This can lead to the emergence of new markets and new areas of growth. At the same time, business models whose success depends on as unhindered an exchange as possible are coming under pressure. Consequently, when evaluating a company, it becomes more important to consider the role it plays within the emerging order and the political dependencies to which it is subject.
Geopolitics Has an Impact Even on Bond Portfolios
The consequences are by no means limited to stocks.
A conflict in a region that is important to the energy sector can disrupt supply and drive up energy prices. This can have implications for inflation, interest rate expectations, and bond valuations. Anyone considering the future composition of their bond portfolio may therefore need to take the oil market into account as well.
This example illustrates how closely geopolitical and financial developments are linked. Asset classes can still be distinguished from one another; however, their risks may stem from the same source.
The stabilizing effect that individual portfolio components have had to date must therefore also be examined under different conditions. Historical patterns provide guidance. Whether they will hold true in a changed environment remains an open question.
Scenarios Instead of Certainties
At FTC, we therefore think in terms of scenarios. This also means taking our own misjudgments seriously.
An investment may seem economically sound, yet it can be fundamentally altered by political developments. Similarly, the assumption that a protective power will naturally intervene in the event of a conflict may prove to be incorrect.
The implication is that we should always consider the possibility of error when forming convictions. To what extent does a portfolio depend on a particular political development? Which positions are affected by the same change? How significant would the loss be if a key assumption proved to be incorrect?
Diversification must take these questions into account. The number of positions alone says little about how different their actual risks are.
What's to Be Voted on During the Midterms
The midterm elections will reveal the extent of public support for the U.S. administration's course of action. Their outcome may influence the pace at which this course is pursued and the political means used to do so.
From our perspective, however, even if the Republicans were to lose power in Congress, it would not mean a return to the previous world order. Competition with China and the U.S. interest in strategic autonomy will persist beyond Election Day.
For investors, therefore, focusing solely on the outcome of the next election is not enough. The bigger challenge is to prepare assets for the various possible trajectories of a long-term transformation.
The portfolio for the new world will have to be measured against different criteria than the portfolios of past decades. The midterms will provide an indication of how quickly these conditions are changing.
The content presented in this article is for informational purposes only and does not constitute investment advice, an offer, or a solicitation to buy or sell securities. Despite careful research, the author or publisher does not guarantee that the information is up-to-date, complete, or accurate. Past performance is not a reliable indicator of future results. All forms of investment involve risks, including the risk of total loss of principal. Before making any investment decisions, you should analyze your individual situation and, if necessary, seek independent professional advice.
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