Indian Markets Are ‘Priced to Perfection'— Unlikely to Rise Much Ahead of Elections

Economic

Stocks

Summary:

India is set to hold its general election between April and May, but investors that believe big market rallies will be seen in the coming months could be wrong. Analysts believe the next big rally could only happen if the Reserve Bank of India cuts interest rates, which could happen in the second half of 2024.

Indian Markets Are ‘Priced to Perfection'— Unlikely to Rise Much Ahead of Elections_1

Indian equity benchmarks the Nifty 50 and BSE Sensex have rallied by more than 6% since the state elections.

The Indian stock markets rallied to new highs in 2023 on the back of bullish investors and stronger domestic participation. But analysts warn that the level of optimism seen last year will not be replicated before the general election concludes.

Indian equity benchmarks the Nifty 50 and BSE Sensex have rallied by more than 6% since the state elections concluded in the first week of December with Prime Minister Narendra Modi's Bharatiya Janata party winning three of four states.

Both the Nifty and Sensex hit record highs of 22,081.95 and 73,000, respectively, during Asia's Monday afternoon trading session.

The country is set to hold its general election between April and May.

"The BJP victory has already been priced in at this point. There were many question marks around the party's victory before the state elections, but a lot of that has gone away," Peeyush Mittal, portfolio manager at Matthews Asia said.

The stock markets have factored in "a lot of positives" and investors might only see a single-digit return of 3%-5% before the election kicks off, Mittal told CNBC in a phone interview.

In the past five general elections, Indian markets have climbed an average 18% six months prior, 8% three months before, 2% in the months after the results, and 10% half a year later, said Shantanu Bhargava, managing director and head of listed investments at Waterfield Advisors.

"If you were to compare it with the historical average, a lot of returns have already been discounted ... and the victory of the current government is already discounted in the market," he said, adding that the markets have been "priced to perfection."

The next rally

So when could investors see another big rally in the Indian markets?

Analysts believe that will only happen when the Reserve Bank of India cuts interest rates, which is likely in the second half of the year.

"If [the RBI] believes that inflation is going to go down durably, then we might see some action in the second half of this calendar year, but it is also completely dependent on the trajectory of consumer price inflation in India," Waterfield Advisors' Bhargava said.

Inflation in the South-Asian country stood at 5.5% in November, and Reuters poll foresees it coming at 5.7% in December — still higher than the central bank's 4% target.

A "harder rally" may come about if the narrative around interest rates becomes more "benign," and rate cuts from the U.S. Federal Reserve and the RBI happen," Mittal pointed out.

Higher investments into India

The confidence in the economy will also boost investments into the country.

India's largest automaker, Maruti Suzuki, announced Wednesday that it would invest $4.2 billion to build a second factory in the country. Vietnamese electric auto maker VinFast said earlier this week it aims to spend around $2 billion to set up a factory in India as well.

The southern Indian state of Tamil Nadu has confirmed that Apple suppliers such as Tata Electronics and Pegatron, have plans to invest more than $4.4 billion in the state, as the iPhone maker strives to diversify supply-chain away from China.

Andrew Holland, CEO of Avendus Capital Alternate Strategies, told CNBC's "Street Signs Asia" last week that he expects $100 billion in inflows to India this year, especially as the country is set to be included in J.P. Morgan's Government Bond Index-Emerging Markets index in June.

According to India's National Investment Promotion and Facilitation Agency, the country received $71 billion in foreign direct investments in its last financial year which ended March 2023.

India, however, still has ways to go in its infrastructure to show the world it can handle all the interest that is coming its way.

"The poverty you witness straight out of the Bombay or Delhi airport prevents people from having a high conviction bet," said Praveen Jagwani, CEO of UTI International.

Sectors to watch

Analysts that spoke to CNBC agreed that Indian markets are currently overvalued, but there are still sectors that hold promise.

"There's a tremendous financialization of savings in the country away from physical assets into more financial assets," said Matthew Asia's Mittal.

While "pockets of the market" are fully valued, financials and consumer staples are still undervalued sectors that are poised to do well this year, said Vontobel Asset Management's Chelat.

"Financials could potentially do well given that it's relatively cheap, is generating good growth and has lagged the broader rally," Chelat told CNBC in a Zoom interview. "And if you see consumption picking up in the rural markets, consumer names that have somewhat lagged could also rally."

Among financial companies, Chelat prefers HDFC Bank, as its merger with India's biggest mortgage lender Housing Development Finance Corporation has increased the lender's mortgage penetration. "It's at the cheapest it's been for a number of years now," he adds.

In the consumer space, Chelat said Eicher Motors is a name that "continues to exceed expectations" as it has a good runway both domestically and in the export markets.

"They have seen very good growth in the festive season which indicates competition in the two wheeler premium segment has grown."

Source: CNBC

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Glendon

Political

Economic

For months, the Federal Reserve's monetary policy trajectory and the U.S. economy have consumed investors, with expectations for 2024 rate cuts by the central bank fueling an explosive stocks rally in late 2023 and putting the S&P 500 (.SPX) within striking distance of a fresh record high.

The importance of those factors for asset prices is unlikely to wane anytime soon. But with the Iowa caucus set to kick off the state-by-state nominating process on Monday, a potentially close race and sharp partisan divisions in the electorate could add unexpected twists to the path for stocks this year.

"The election is introducing an extra layer of uncertainty," said Irene Tunkel, chief U.S. equity strategist at BCA Research.

This year's election is pointing toward a rematch between President Joe Biden, a Democrat, and former President Donald Trump, who holds a commanding lead over Republican rivals.

However, any narrowing of the Republican field following the Iowa caucus "could also make for a more competitive race" for the party's nomination, Goldman Sachs economics analysts said in a Monday note. Trump's lead in the upcoming New Hampshire primary would shrink to around 3% if the field narrowed to him and former South Carolina Governor Nikki Haley, they said.

"Uncertainty tends to rise at the start of presidential election years, and that pattern looks particularly likely to hold in 2024," the bank's analysts said.

WHAT HISTORY SHOWS

A president seeking re-election, as Biden is this year, has in the past been concurrent with above-average performance for U.S. stocks. Since World War II, the S&P 500 has gained all 14 times in the year that a president has sought re-election, regardless of who wins, with an average total return of 15.5%, said CFRA chief investment strategist Sam Stovall. That compared to the index's average annual return of 12.8% in that period.

Overall since 1928, the S&P 500 has gained about 7.5% on average in presidential election years, according to RBC Capital Markets.

Seasonal patterns in election years, however, suggest the ride is not always smooth. The first three months or so of an election year tend to be choppy for stocks, with the S&P 500 generally flat, said Keith Lerner, co-chief investment officer at Truist Advisory Services, who reviewed data going back to 1950. The three months ahead of Election Day in early November also tend to be volatile, Lerner said.

The seasonal pattern of election years "does provide another reason to be on guard for an early year pullback," Lori Calvasina, RBC's head of U.S. equity strategy, said in a note on Monday.

US Elections Toss Twist at Markets Fixated on Fed, Economy_1

This year, tax and spending policies are among those investors will be watching. During his presidency, Trump enacted tax cuts set to expire in 2025, with Republicans expected to try to prevent that from happening.

Democrats and Biden, who enacted a wide-ranging law that seeks to promote clean energy and lower prescription drug costs, would be expected to pursue tax hikes on corporations and the wealthy while spending to expand the social safety net, such as childcare investments, according to Oxford Economics.

An economic downturn this year would likely increase market focus on the elections, said Matthew Miskin, co-chief investment strategist at John Hancock Investment Management.

"If the economy does start to decelerate and we potentially see a recession, then the fiscal response and who becomes the political leaders will become much more important to markets," Miskin said.

Certain areas of the stock market could become particularly volatile as the race advances and policy proposals are fleshed out, including any related to healthcare costs, defense spending or energy regulations.

In the 2020 election, for example, solar stocks rose as Biden's election prospects improved. Trump's victory in 2016 sparked a so-called reflation trade that boosted a broad range of sectors on expectations of looser fiscal policy.

Some investors doubt the election will have a lasting effect on markets. One factor potentially moderating the impact is expectation of a split Congress following the election that limits more radical policy changes.

While elections can bring some volatility, "the over-arching theme that matters the most is where are we in the economic cycle," said Jack Janasiewicz, portfolio manager at Natixis Investment Managers Solutions.

Source: REUTERS

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Ukadike Micheal

Economic

Stocks

Asian stock benchmarks reached historic highs, with India's S&P BSE Sensex surging over 1% to a record peak, propelled by gains in tech stocks and shares of conglomerate Reliance Industries. Meanwhile, Japan's Nikkei 225 extended its six-day winning streak, reaching another multidecade high, driven by expectations of the Bank of Japan maintaining a super-loose monetary policy. European stocks faced pressure due to declining shares of banks and auto companies, influenced by Germany's contracted economy in 2023 amid weakened global demand for its industrial goods.

As U.S. equity and bond markets observed Martin Luther King Day, investors eagerly awaited bank earnings and economic data later in the week for insights into the Federal Reserve's future actions. U.S. stock futures displayed wavering on Monday, setting the stage for potential market movements upon reopening.

Concerns over the global geopolitical landscape impacted crude oil prices, slipping 0.7% to dip below $78 a barrel. Analysts focused on tensions in the Red Sea and other Middle Eastern waterways, with U.S. Central Command reporting the downing of a cruise missile fired from Iran-backed Houthi militant areas toward an American warship.

The upcoming fourth-quarter earnings season, commencing with filings from Goldman Sachs, Morgan Stanley, and PNC Financial Services on Tuesday, promises to provide critical insights into the health of corporate America and the broader economy. Earlier reports from major banks like JPMorgan Chase and Bank of America indicated surprising financial resilience among consumers and businesses in 2023.

Attention also turns to economic data, with retail sales figures expected to take center stage on Wednesday. Following slower-than-expected growth in producer prices last week, investors increased bets on a potential Federal Reserve interest rate cut as early as March. Interest-rate derivatives suggested a 70% likelihood of a cut, up from 63% the previous week, according to CME Group.

The global financial landscape reflects a complex interplay of market dynamics, economic data, and geopolitical tensions. As markets brace for the reopening of U.S. exchanges, the week ahead holds the promise of providing valuable insights into the trajectory of both the financial sector and the broader economy.

Source: Bloomberg

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Chandan Gupta

Traders' Opinions

Forex

Fundamental Analysis

Euro encountered a rough patch against the dollar as ECB hinted at potential rate cuts, triggering a ripple effect in the financial landscape. Analysts pointed fingers at these remarks as the driving force behind the surge in European stocks, painting a picture of investors gaining confidence in the prospect of rate cuts arriving in May.

Now, let's unravel the complexity of this scenario. The unspoken rule is that heightened expectations of ECB rate cuts, especially in comparison to other regions, cast a shadow on eurozone bond yields and the euro itself. Christine Lagarde, ECB President, injected further fuel into the fire during an interview with France 2 television, expressing her belief that interest rates might not see a rise unless unforeseen shocks or unexpected data disrupt the scene.

Lagarde's optimism shines through as she articulates, "If we win our battle against inflation, and if we are confident that inflation will indeed be at 2%, at that point interest rates will start to go down." It's a delicate dance between battling inflation and orchestrating a synchronized descent in interest rates.

However, Lagarde maintains that it's too early to talk about interest rate cuts, citing wage growth in the eurozone as a factor that might make reaching the sustainable 2.0% target challenging. The shift in narrative, setting the terms for a potential reduction, underscores a pivotal moment in the ECB's stance.

Examining the Forex market dynamics, the euro's performance doesn't scream major weakness, but subtle nuances hint at distinctive elements of vulnerability. The currency's dip against all major currencies, excluding the Swiss franc, is noteworthy. Lagarde's refusal to commit to a specific date for interest rate cuts adds an air of uncertainty, despite her projection of inflation hitting 1.9% by 2025.

Zooming out to a global perspective, central banks worldwide are preparing to pivot from the most aggressive tightening campaign in decades to easing monetary policy as inflation takes a nosedive. Bloomberg Economics' measure of global interest rates reveals a decline of 128 basis points over the year, spearheaded primarily by emerging economies.

The international landscape witnesses a mixed bag of central bank decisions. Poland, Serbia, and Korea maintained their interest rates steady, while Peru opted for a rate cut. The anticipated ease in monetary policy comes as a response to the persistent decline in inflation, a trend that defies expectations for 2024.

Surprisingly, just days into the new year, unforeseen challenges have emerged. Ongoing attacks by Houthi rebels in the Red Sea have disrupted the main shipping route through the Suez Canal. This geopolitical turmoil has caused red sea freight rates for goods from Asia to Europe to more than double over the past four weeks. The unexpected ripples from these events remind us of the ever-present unpredictability in the global economic landscape.

In the next few weeks, governments in the United States, Britain, and the eurozone are gearing up to flood the market with bonds at unprecedented rates. Faced with an inflated deficit that was once inconceivable, these countries, along with Japan, are set to sell a combined $2.1 trillion in new bonds to finance their expansive spending plans for 2024. This represents a significant 7% increase from the previous year, according to estimates by Bloomberg Intelligence.

The impending surge in bond issuance reflects the collective effort of these nations to stimulate their economies, combating the challenges posed by inflation and economic uncertainties. As the bond market braces for this deluge, it raises questions about the potential impact on interest rates, market dynamics, and the broader financial ecosystem.

In conclusion, the euro's dance in the financial arena reflects a delicate interplay of economic indicators, central bank strategies, and geopolitical events. Lagarde's remarks, while offering insights into the ECB's thinking, also underline the uncertainty that pervades the market. As global economic shifts continue to unfold, traders and investors navigate through a landscape marked by both challenges and opportunities, where every comment, decision, and geopolitical event has a role in shaping the financial narrative.

Technical Analysis

So, technically speaking, the pair made a swift move, teasing the psychological resistance level of 1.1000. It flirted for a moment but decided to retreat, finding comfort around 1.0935 on Friday. The week concluded with the EUR/USD pair settling at approximately 1.0950, setting the stage for a rather uneventful ending.

Now, Christine Lagarde, the captain steering the Eurozone ship, added a dose of uncertainty to the mix. She hinted at the possibility of rate cuts, injecting a flavor of intrigue into the market. The backdrop for this drama is a growing confidence that inflation is on its merry way to hit the coveted 2.0% target.

In the currency performance ranking, the euro found itself in a peculiar position. It earned the title of the second worst-performing major currency on Friday. Lagarde's remarks, proclaiming that "the hardest and worst part" of the battle against inflation is in the rearview mirror, contributed to this narrative.

Taking a peek at the daily time frame chart, it paints a picture of neutrality in the price performance of the EUR/USD. The technical wizards among us suggest that an upward shift is a distant dream without stability above the psychological resistance of 1.1000. This magic number could trigger a flurry of technical buying deals, creating a pathway for a more certain shift to the upside.

In the dollar's corner, recent moves have seen it inching towards the resistance levels of 1.1065 and 1.1120, respectively. On the flip side, the bears have their eyes on the move towards the support level of 1.0880. It's a tug of war between the bulls and bears, a storyline that unfolds on the chart.

Now, a curveball – today is an American holiday, injecting an element of unpredictability into the mix. Investor sentiment and liquidity might take a back seat, and we brace ourselves for limited movements in the EUR/USD pair. It's like a momentary pause in the financial universe, giving traders a chance to catch their breath.

As we navigate the complexities of the Forex market, it's essential to recognize the interplay of technical levels, central bank rhetoric, and global events. The EUR/USD pair, like a character in a financial drama, responds to each twist and turn with its own set of moves. Traders, akin to avid spectators, watch the drama unfold, armed with charts, indicators, and a keen sense of market dynamics.

In conclusion, the EUR/USD pair's journey is a tale of numbers, psychology, and economic narratives. Lagarde's words and the psychological resistance level of 1.1000 add layers of intrigue to the unfolding drama. The daily chart captures the struggle for dominance between the bulls and bears, while the dollar inches towards its own set of resistance levels.

In the grand scheme, an American holiday introduces an element of suspense, where the usual rhythm of the market might be disrupted. Traders, ever vigilant, adjust their strategies, aware that in the world of Forex, a single comment, a technical breakout, or a holiday can shape the narrative. As we await the next chapter in the EUR/USD saga, the market remains a stage where each participant plays a role, and every move counts. Euro Takes a Hit as ECB Hints at Rate Cut_1

Euro Takes a Hit as ECB Hints at Rate Cut_1

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Ukadike Micheal

Economic

Forex

Despite facing economic contraction in 2023, Germany managed to evade a technical recession, as preliminary estimates showed a 0.3% decline in GDP for the last quarter. This followed a revised 0% growth in the previous three months, sparing Europe's largest economy from consecutive quarters of contraction. However, the overall economic performance in 2023 reflected a challenging year, with a 0.3% contraction, marking the first downturn since the pandemic.

The economic struggles in Germany stand in stark contrast to its global peers, raising concerns about the country's future as an industrial powerhouse. Ongoing worries about Germany's economic prospects are echoed in growth predictions for the current year. The OECD projected slow growth of 0.6%, anticipated to be the lowest among all G20 members except Argentina. Economists foresee minimal growth in the initial half of 2024, with concerns heightened by train strikes and nationwide protests.

Industry experts express uncertainty about Germany's economic trajectory in 2024, with the DIHK Chambers of Industry and Commerce stating that economic performance may stall, and the possibility of remaining in a recession still looms. The challenges ahead include potential industry weakness impacting growth, despite expectations of a slow ramp-up in 2024.

The economic landscape in 2023 prompted discussions about Germany potentially becoming the "sick man" of Europe once again, a title it earned in the 1990s after reunification. Finance Minister Christian Lindner and Bundesbank President Joachim Nagel dismissed such concerns, asserting that Germany has demonstrated adaptability to changing environments. However, challenges persist, including a business model heavily reliant on Russian energy imports and China as a key market.

The central bank acknowledges challenges to the established business model, emphasizing the impact of higher energy costs, surging interest rates, and subdued foreign demand on the manufacturing sector. Despite relief at the beginning of the year regarding the manageability of the energy shock from Russia's war in Ukraine, the anticipated economic recovery in the second half of 2023 failed to materialize, contributing to a broader economic slowdown.

Factors contributing to the disappointing performance in 2023 include declines in manufacturing, state spending, and private consumption. This economic downturn has sparked internal debates and fueled dissatisfaction, with some questioning Germany's ability to adapt and thrive in a changing global landscape.

Amid economic challenges, internal political discord within Chancellor Olaf Scholz's three-party alliance has complicated efforts to address Germany's woes. The rise in popularity of the far-right AfD and protests by farmers highlight the growing discontent with the government. The Constitutional Court's disruption of investment plans at the end of 2023 further adds uncertainty, impacting households and firms.

As Germany navigates through economic headwinds, Bundesbank President Joachim Nagel emphasizes the need for the country to "do its homework." The outlook for 2024 remains cautious, with expectations of modest growth amid ongoing challenges. The path ahead for Germany involves addressing internal issues, adapting to global changes, and fostering an environment conducive to economic recovery.

Source: Bloomberg

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Ukadike Micheal

Cryptocurrency

The debut of Bitcoin exchange-traded funds (ETFs) marks a significant milestone for the cryptocurrency, thrusting it into the realm of Wall Street's major players. The move is seen as a gateway to broader investor participation, potentially unlocking access to the vast portfolios managed by institutions like pension funds and financial advisors, which collectively oversee around $100 trillion. Proponents argue that even a marginal allocation of institutional assets to Bitcoin could have a substantial impact given the cryptocurrency's current market value of $900 billion.

Despite the optimism, caution is advised as the journey to mainstream adoption is anticipated to be a gradual one. The logistical challenges are evident as numerous Bitcoin ETFs enter the market, each requiring scrutiny by financial advisors. Unlike traditional stock or bond funds, these ETFs may undergo more rigorous due diligence and compliance reviews before securing a place on platforms managed by major banks like Bank of America, Morgan Stanley, and UBS. These institutions, with assets totaling hundreds of billions, could significantly influence the fate of Bitcoin ETFs based on their advisors' decisions regarding client allocations.

Addressing the potential demand for Bitcoin in light of ETF approvals, the cryptocurrency's recent price surge—up over 75% in the last three months—is acknowledged. However, proponents emphasize that the cryptocurrency market remains relatively small and thinly traded. They argue that it lacks the structural size to immediately absorb a substantial influx of institutional capital, with even a billion dollars considered a significant amount in the crypto space.

Coinbase Global emerges as a central figure in this narrative, with its stock witnessing an upswing amid ETF enthusiasm. Coinbase's CEO, Brian Armstrong, views the ETF approvals as a "monumental step" for both the crypto industry and Coinbase itself. Optimists believe that Bitcoin ETFs will not only benefit Coinbase but also elevate the entire crypto market, including alternative coins like Ether. The rationale is that as more investors embrace the asset class, Coinbase's crypto ecosystem will thrive, compensating for any potential reduction in Bitcoin trading volume.

However, a bearish perspective suggests that Bitcoin ETFs might cannibalize traders who find it more convenient and cost-effective to use an ETF rather than engage in token exchanges. While Coinbase serves as the custodian for many Bitcoin ETFs, the associated activities may be less lucrative than the company's retail trading business, where it can earn over 1% of a transaction through fees and bid/ask spreads.

In the backdrop of the SEC's cautious approval of Bitcoin ETFs, the regulatory landscape remains a critical factor. SEC Chair Gary Gensler's skeptical view of Bitcoin as compared to traditional commodities like gold adds an element of uncertainty. Ongoing legal battles, such as the case between the SEC and Coinbase, further contribute to the regulatory complexity. The outcome of these cases may significantly impact the revenue models of crypto-related businesses and influence the trajectory of the industry.

While celebrating the current victory, industry insiders are already contemplating the next frontier—a potential ETF holding Ether, the second-largest cryptocurrency. However, regulatory considerations come to the forefront again, as regulators have not provided the same assurances regarding Ether as they have for Bitcoin.

In contrast to the prevailing optimism, Vanguard, a prominent index fund giant, takes a skeptical stance by excluding Bitcoin ETFs from its brokerage platform. Vanguard argues that such products do not align with traditional asset classes like equities, bonds, and cash, which the company considers the foundation of a well-balanced, long-term investment portfolio.

The overarching question remains: Can Bitcoin evolve into a foundational building block for investment portfolios, or will it remain a niche asset on the fringes of mainstream finance? As the crypto industry navigates these challenges and opportunities, the emergence of Bitcoin ETFs signifies a pivotal moment, with implications that extend far beyond the digital realm into the heart of traditional financial markets.

Source: Barrons

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Devin

Economic

2023 will be remembered for its tumultuous wars and fervent activism, yet it was marred by a wide lack of outcomes, potentially rendering it a “lost year” in history.

The tension between Western powers and their adversaries, China and Russia, persisted without fundamental shifts despite lots of strategic maneuvering. Conflicts in Ukraine, the Middle East, the Horn of Africa and the Congo trudged on unabated.

In the welfare states, especially Europe, the question of immigration loomed large with no clear answers. The pursuit of decarbonization and climate protection saw grand gestures and sweeping commitments. However, progress was entangled in red tape and bureaucratic complexity, overshadowing – even hampering by dogmatic policies – real and strong advancements by business.

There was relief as the dark clouds of a threatened recession dissipated and inflation moderated. Yet the calm may be short-lived as the core issues of mounting debt and an overstretched bureaucracy loom larger, with technocratic meddling in economic affairs exacerbating the situation.

Superficially, little has changed, echoing the sentiment of King Louis XVI of France, who on the eve of the storming of the Bastille, penned a dismissive rien – “nothing’’ – in his diary. It was a clear failure to recognize the circumstances that triggered the French Revolution.

The world is undeniably in crisis. Yet crises can be catalysts for either rapid decline or significant improvement.

Optimism must be tempered with realism. The global landscape is indeed transforming, but many cling to old patterns of thought. The West often views international relations through a rather imaginary lens of democracy versus autocracy. Today’s “axis of evil” from the Western perspective is led by China, Russia and Iran. The West wants the Global South to take its side. But, for the most part with some exceptions like Javier Milei’s Argentina, this is not going to happen. The concept of a rules-based world order is being contested.

The Kremlin understands the emerging realities and eschews the term Global South in favor of recognizing these nations as the “global majority.” This more collaborative stance is exemplified by the evolving partnership between Russia and India as the Kremlin distances itself from Western alliances. Yet Russia’s brutal war against Ukraine underscores Moscow’s inability to reconcile its imperial ambitions with the self-determination of its neighbors.

The late Zbigniew Brzezinski, who was a sage foreign policy analyst, once declared that Russia without Ukraine would cease to be a Eurasian empire. This was true at the time. But now it is more fruitful for Russia to consolidate relations with the East, leading Moscow to strengthen collaboration primarily with China, but also with the two Koreas and Japan. However, Russian delusions of grandeur prevent it from embarking on further constructive priorities, from accepting its western borders to engaging Europe and developing Siberia.

Amid geopolitical reorientations, the necessity of a Russo-Chinese alliance is mutually recognized. Russia’s pivot to the East is a fact, but Moscow still seeks a buffer zone in Central Europe, an ambition that poses a significant threat to European security.

With elections ahead in the U.S. and socioeconomic problems in China, Washington and Beijing are attempting to smooth over trade relations. These tactical adjustments, however, do not signify a true easing of underlying tensions. China’s millennia-old aspirations for hegemony differ from past conflicts such as the Cold War. Unlike the Soviet Union, China’s quest for dominance is less about exporting its political ideology and more about affirming the supremacy of the Chinese Communist Party within its borders. Therefore, the European Union’s view of China as a “systemic rival” is a wrong assessment of the situation. But it must be recognized that Beijing is pressing for a new world order and its ambition is hegemony.

Other elements at play were absent during the Cold War. The Soviet Union was not an important economic factor, while now economic relations with China are crucial for every country, even more so than trade with the U.S. or Europe for many nations. Southeast Asian nations, while reliant on China economically, seek alliances especially with the U.S. for security reasons. But these nations also want to diversify their international relationships to reduce their dependencies on Beijing and Washington.

Europe finds itself in decline, yet this trajectory is not set in stone. This is a matter we will undoubtedly return to in another comment.

Economically, the global debt crisis looms large, with the potential to trigger widespread social upheaval in the foreseeable future. Intolerant nongovernmental organizations as well as governments, both democratic and autocratic, consider inequality as the root of all economic woes. However, this perspective misses the mark by overlooking the fact that shrinking the wealth of the affluent does not balance budgets nor decrease poverty. Economic growth and increased prosperity are best achieved by letting individuals and businesses thrive with minimal government interference.

Unfortunately, the trend is going in a different direction, pivoting from growth to bureaucracy. The entrepreneurial spirit is hampered under the weight of an ever-expanding regulatory web. The resulting compliance burden is an anchor dragging down productivity.

Economic inequality has dual origins. One stems from the tremendous innovations that naturally create winners in a dynamic marketplace. In such a system, free-market forces act as levelers, smoothing out disparities over time. The other cause is state overreach in which excessive legal and regulatory regulation foster oligopolies and even monopolies. Yet another insidious form of excessive state intervention is corruption.

The recent pivot in U.S. policy, dubbed the “New Washington Consensus” by President Joe Biden’s national security advisor Jake Sullivan, strays from the previous market-driven approach that spurred global prosperity. This shift favors more economic planning and government intervention through empowering entities such as the G20 and G7 without sufficient accountability. This is an attempt to establish a globally planned economy if pursued to its logical conclusion. It also neglects the fact that consensus can only be successful based on interests and not on policies.

Through whatever changes that take place, the U.S. will likely remain dominant, buoyed by its favorable geography and formidable defenses. The technological advantages it enjoys over other nations are huge. The dollar remains the global reserve currency. But its overuse for geopolitical leverage, coupled with the nation’s burgeoning debt, foreshadows a potential erosion of its financial hegemony. Furthermore, the ascent of digital currencies and other technological advancements are likely to weaken existing fiat currencies over the long term.

Encouragingly, science and technology continue to make huge progress. Paired with deregulation, they hold the promise of rejuvenating global growth, reducing poverty and easing social conflicts. This optimistic future is contingent on restraining government and supranational organizations from stifling economic dynamism and increased productivity.