We publish the second part of this analysis which examines the implications of the US presidential election result and what they mean for specific asset classes.

The chief investment officer of WELREX, Kirill Pyshin, gives his investment outlook for 2025 and reflects on the recent currency and stock market behaviour in the wake of the US Presidential elections. This is the second article of a two-part analysis – see the first part here.

The editors are pleased to share these views; the usual editorial disclaimers apply to views of guest writers. To respond, email tom.burroughes@wealthbriefing.com and amanda.cheesley@clearviewpublishing.com

The dollar is facing some headwinds due to geopolitics
The US has been in the privileged position of holding the world’s reserve currency of choice – the dollar – and its debt obligations are considered almost risk-free. This means that every time the US needs to refinance its debt, there are plenty of willing buyers. Foreigners and central banks own about half of the US treasury debt (18).

This may be changing. The proportion of central bank reserves kept in dollars has fallen to 59 per cent from its peak of 73 per cent in 2001 according to IMF data (19). China has also been making a significant effort to reduce the dollar share in invoicing for cross-border trade, which it views as one of its biggest vulnerabilities (20). Weaponisation of the dollar by its use as a sanctions mechanism, may have contributed to this move.

At the last BRICS summit held in October 2024, a solution was proposed in the form of a “BRICS Bridge.” The expanded BRICS club now has 10 country members with 3.3 billion people and GDP at PPP larger than G7 (21). The system will be built within a year allowing participant countries to conduct cross-border settlements using a digital platform run by their central banks, without the need to use dollars or the corresponding banks in the US. To add to the attraction, the use of digital money should make this system cheaper and faster.

Of course, this is a relatively long-term trend but, in the meanwhile, the dollar has exuberantly greeted the Trump victory in expectation of more tariffs and over the near term it could continue to move up. However, we find it difficult to comprehend why the currency of a country with inflation, spiralling national debt, widening budget deficit and signs of a cooling economy would strengthen, even in the near-term.

We prefer eurozone exposure in euros
Given our concerns around debt, valuations and corporate growth in the US, at this point we prefer fixed income and equities by the eurozone issuers in euros.

In contrast to the US, the eurozone overall has been making efforts to reduce its budget deficit, which, similarly to the US, ballooned during the great financial crisis (GFC) and then again during Covid-19. In the eurozone, GFC was followed by recession with rapid increase in debt/GDP ratios, which led to the sovereign debt crisis, when several eurozone member states such as Greece, Ireland and Portugal were unable to service their debt, nor devalue their common currency.

The onset of the debt crisis was in late 2009 when the Greek government disclosed a far higher budget deficit than expected ( 22). The Greek government debt to GDP just before the recession was hovering near 100 per cent, similar to what it is now in the US, but then it rapidly increased to above 180 per cent by 2011. By then, the debt of Italy, Ireland and Portugal were also above 100 per cent. Then EU legislation was strengthened around The Stability and Growth Pact (SGP), requiring a fiscal cap of 3 per cent of GDP and public debt target of 60 per cent (23).

The decade of austerity which followed was associated with slower growth and weaker employment than in the US.

Today, EU countries are forced to take measures when their debt and deficit are on an unsustainable path. For example, France’s new government led by the experienced “Mr Brexit” Michel Barnier has just proposed major tax increases and spending cuts to bring their 6.1 per cent budget deficit to the 3 per cent EU target by 2029 (24). Even the UK, which is not part of the EU anymore, has just announced one of the largest tax increases in its history to plug the budget deficit, but unfortunately it was matched by even larger spending plans.

One important difference with the US, however, is that it can chose to devalue the dollar rather than go through years of austerity. President Trump is also very clear in his desire for a weak dollar. This is why a weak dollar remains our main scenario, which, in combination with slowing growth, could lead to stagflation in the US.

In contrast, the EU has already gone through the years of austerity and its debt is now on a sustainable path. European consumers, unlike those in the US, have plenty of excess savings (25). European industry remains depressed with its high energy costs relative to the US, but in our opinion even this situation may soon improve due to geopolitics.

European equities trade is at a discount to the US, which is justified by weaker growth and is typical. However, this discount has grown significantly more than warranted over the last years, in our opinion. Importantly, they are also much cheaper vs their own history.

Lower energy costs with the end of geopolitical conflicts could be the catalyst that would propel the European equity market into action.

Chinese equities could be an interesting bet
Other interesting opportunities may be found in China (26), which is trading at a large discount compared with its own history. The risk of additional tariffs, primarily aimed at China, of course make us cautious. However, the Chinese government is maybe at the point of providing some stimulus. On 8 November, China announced a Rmb10 trillion ($1.4 trillion) fiscal package aimed to help local governments to restructure their finances (27). More stimulus may come in response to additional US tariffs. We therefore maintain some exposure.

Additional stimulus aimed at Chinese consumers, would also be beneficial for European luxury products. The European luxury sector has particularly underperformed recently on weak Chinese demand (28). This could offer another interesting bet.

Resolution of the geopolitical conflicts could hit commodity prices. With the election of Trump, the two important geopolitical conflicts are approaching their resolution, in our opinion, which would remove supply restrictions on a range of important commodities. Without a simultaneous increase in demand, this would lead to falling prices, which is why we are not suggesting commodities as an inflation hedge.
Oil prices are spiking with every escalation in the Middle East. This is because of the potential threat to the oil extraction, refining and transport, importantly including the oil and petroleum products transit though the Strait of Hormuz, the world’s most important route, through which flows around 20 mbpd (29).

At WELREX we feel optimistic. Firstly, we believe that both Israel and Iran have been restraining their direct attacks on each other. This gives us hope that the Middle East is on the path to de-escalation. Secondly, the new US administration is likely to push for the resolution of this conflict. President Trump is a businessman who prefers the “Art of The Deal” to war mongering. He said he wants peace for the Middle East. The conclusion of this conflict would remove the supply constraints on oil. In addition, Trump is a big supporter of US shale, which would further add to supply.

Similarly, Trump will push for the resolution of the conflict in Ukraine. He repeatedly said that he can end it within 24 hours. While we doubt it is possible that fast, we believe the US will now provide a forceful push towards a negotiated solution. Moreover, the accelerating recent Russian army advances (30) will force Ukraine to moderate its negotiating position.

On the other hand, we think that the Russian economy is stretching itself, as illustrated by the total state spending on defence and security of almost 41 per cent of total expenditure or 8 per cent of the country's GDP (31). This by itself, may not be sufficient because most of this spending goes to domestic industry, witness Russia’s 3.6 per cent GDP growth in 2023 (32) and the recent quarters above 4 per cent.

However, we believe that Russia would be willing to halt their advances in exchange for the removal of the international sanctions. Therefore, the negotiated peace would likely come with easing of sanctions on a wide range of hard and soft commodities from Russia. Ukraine is also a big supplier of many commodities where the infrastructure or supply routes are currently under threat.

The removal of sanctions on oil, gas and industrial metals very much aligns with the European interests, and especially Germany, which is keen to lower energy prices as a way of making its industry more competitive again. Italy is another country which previously heavily relied on Russian gas and therefore would likely benefit disproportionally.

Cheaper energy would feed through lower costs for business and consumers thus lowering inflation and boosting the economy. Lower commodity prices could be an important catalyst for Europe, where we recommend building exposure. Conversely, because of the likely increase in supply and hence falling prices, we dislike commodities that would typically be a good hedge against US inflation. Instead, we own gold and Swiss francs as an inflation hedge.

Bitcoin would also be a good hedge for those who could stomach its volatility. President Trump and Elon Musk are both enthusiastic supporters of crypto. Regardless, we see more signs of institutionalisation of digital currencies with more crypto-linked ETFs from traditional institutional money managers.

Footnotes

18. https://www.alliancebernstein.com/content/dam/global/insights/insights-whitepapers/the-usnational-debt-debt-or-alive.pdf
19. The Economist, Special report “The Dollar”, October 14, 2024
20. The Economist, “Putin’s plan to dethrone the dollar”, October 20, 2024
21. https://www.europarl.europa.eu/RegData/etudes/BRIE/2024/760368/EPRS_BRI(2024)760368_EN.pdf
22. Copelovitch, Mark; Frieden, Jeffry; Walter, Stefanie (14 March 2016). "The Political Economy of the Euro
Crisis". Comparative Political Studies. 49 (7): 811–840. doi:10.1177/0010414016633227. ISSN 0010-4140.
S2CID 18181290.
23. https://www.intereconomics.eu/contents/year/2022/number/1/article/eu-fiscal-rules-a-look-backand-the-way-forward.html
24. https://www.reuters.com/world/europe/french-government-present-2025-belt-tightening-budget2024-10-10/
25. BCA Research, global investment strategy, “Fourth Quarter 2024 Strategy Outlook: Soft Landing
or Quicksand?”, September 28, 2024
26. https://worldperatio.com
27. https://www.ft.com/content/97501755-4cbe-4ce8-8b05-b0e10cbbb866#post-1e807cf4-7ef9-
48da-89d8-d17f2907c2f0
28. https://www.bloomberg.com/news/articles/2024-10-16/lvmh-plunges-as-chinese-luxuryspending-slowdown-worsens
29. https://www.eia.gov/todayinenergy/detail.php?id=61002#
30. https://deepstatemap.live/#6/49.4383200/32.0526800
31. https://www.reuters.com/world/europe/russia-hikes-national-defence-spending-by-23-2025-
2024-09-30/
32. https://data.worldbank.org/indicator/NY.GDP.MKTP.KD.ZG?locations=RU

Important disclaimer
This article is provided for information purposes only. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.