Geopolitical risks may be mounting, but stocks are still the “asset class of choice,” according to Beat Wittmann, partner at Porta Advisors, who also said the outcome of the U.S. election in November would be “pretty irrelevant” for markets.
As investors enter an unprecedented year for elections around the world amid multiple large-scale conflicts at risk of further escalation, Wittmann acknowledged that “politics will remain difficult and confusing,” but that markets will likely be sanguine.
“There are two transmission mechanisms. One is energy prices — will the trouble in the Middle East be a transmission into higher energy prices, or the war in Eastern Europe? Not really, if you look at how energy prices have developed,” he told CNBC’s “Squawk Box Europe” on Tuesday.
“And the second thing is really international trade and trade routes. We have seen it brutally in Covid and we see a bit of it of course — traffic through Suez, insurance companies putting up costs, etc.— but that’s all digestible.”
He added that markets had “gotten used to trouble in geopolitics” over the last five years, so the impact on asset prices of any further bad news would be somewhat limited.
Last year offers some support to this theory. Despite the breakout of the Israel-Hamas war and Russia’s invasion of Ukraine showing no sign of abating, along with a host of other simmering geopolitical tensions around the world, the S&P 500 gained 24% in 2023.
However, much of the momentum was driven by the outstanding performance of the so-called “Magnificent Seven” mega-cap tech stocks, leading to some concerns among investors about concentration risk. Wittmann acknowledged that risk, but remains bullish about broader upside potential in stocks.
“I think it’s on track, of course expectations get ever higher, so there will be at some stage disappointments here and there, but stock-specific.”
“But technology clearly has real mania potential, and there could be even a melt-up in the market led by technology.”
Monetary policy emerged as the key driver of a huge rally toward the end of the year after the Federal Reserve signaled that at least three interest rate cuts were on the table in 2024, offering a particular boost for high-growth stocks. The Fed releases its next monetary policy decision and forward guidance on Wednesday.
Wittmann suggested the only risk to this momentum would be if inflation proves stickier than the Fed expects because of some unforeseen geopolitical risk coming into play, resulting in interest rates being kept higher for longer.
But he believes that would be a problem only for fixed income and the growth stocks that have enjoyed much of the recent rally, and would be positive for value stocks — those trading at a discount relative to their financial fundamentals — meaning if “in any doubt, I think equities are really the asset class of choice.”
U.S. election ‘irrelevant’ for markets
Much of the conversation at the recent World Economic Forum in Davos, Switzerland, focused on the possibility of Donald Trump returning to the White House, and whether his erratic decision-making and radical policy proposals, such as sweeping 10% tariffs on all imports, would be material for investors.
Wittmann said the outcome of November’s election would be “pretty irrelevant for markets, quite frankly.”
“If you have such a strong position as an economy, which the U.S. has in a supreme way, controlling and basically dominating finance, dominating technology, dominating aerospace defense, having achieved strategic autonomy in energy, for example, then it’s really difficult, so no matter whether he gets elected or not, he will also not be able to surprise,” he said.
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