In January 2021, we presented 5 investment themes for the year. A particular focus was placed on the harmonized, or even correlated evolution of the largest economic blocs’ monetary policies, and its consequences.

Thus, post-pandemic and in order to revive their respective domestic economies, Central Banks kept their interest rates at the bottom while injecting massive amounts of liquidity. The (un)stated objective was monetary devaluation to stimulate growth. While applying the same remedies and precepts everywhere, the race to competitive devaluation was launched. Since the motivations for devaluing the external value of their respective currencies were identical, and the opposing forces cancelled each other out, the downward adjustment of the real value of the currency had only a little chance of being achieved. Finally, to keep their purchasing power intact, investors had to consider an adjustment variable outside the fiduciary system.

Our conclusion, then, was to look for potential alternatives to fiat currencies. Gold, real assets and digital assets, especially bitcoin, were options to consider.

Within a few months, the face of the world and the balances have changed dramatically. These expansionary monetary policies combined with a surprisingly dynamic post-Covid economic recovery have contributed to a rapid surge in inflation. While the prices’ increase was only supposed to be temporary, it was extended following a series of events: the shameful attack on Ukraine by Russia, coupled with a resurgence of Covid in China, and wage pressure (especially in the United States). The later being justified by, among other things, a low unemployment rate. As such, the upward trend in the prices of consumer goods and energy has continued on its parabolic movement.

In addition to the potential consequences of an inflationary spiral, these sudden changes are reshuffling the geopolitical cards and modifying alliances. Banished from the Western nations, Russia has quickly turned to other potential partners. In the stranglehold of a world economy still dominated by the dollar, the emerging countries, led by China, India, Russia and Brazil, now see the possibility of emancipating themselves from the United States dominance. The non-condemnation of the Russian attack on Ukrainian lands shows that these countries are opening the door to new agreements (essentially commercial). As the saying goes, opportunity makes the thief!

This new geopolitical order, which sees a group of countries representing more than 40% of the world’s population, or 3.2 billion people, unofficially allied, seeks to free itself from its dependence on the dollar. As Jacques Attali explained in 2006 in his book “Une brève histoire de l’avenir” (A Brief History of the Future), the post-World War II American domination built around a hegemonic dollar should end with a progressive withdrawal. By focusing more and more on its domestic challenges while abandoning its leadership on the international scene, the American empire is loosening, consciously or not, its grip on dollarized world trade. This loss of influence is reflected in the declining dominance of the US economy in terms of its contribution to the world’s growth domestic product. According to Statista, adjusted for PPP (Purchasing Power Parity) in 2020, China would rank first with a share of 18.33% of world GDP, compared with 15.83% for the United States. It can be observed that, for more than a decade, the American contribution to the World GDP has been shrinking to the benefit of India and China.

As for Central banks, they are showing a clear desire to diversify their foreign exchange reserves. In this respect, the sanctions against Russian central bank dollar-denominated assets have acted as an electroshock, if not a surprise. Many Reserve Banks, guided by their respective governments, want to regain control of their future without the dollar. This pushes them to free themselves from potential western’s sanctions, perceived as unfair. The freezing of Russian assets is forcing these actors to look for alternatives, like Saudi Arabia which says it is studying the possibility of accepting Yuan payments for its oil exports to China. Indonesia and China had already signed an agreement in 2021 to allow payment in their respective national currencies for their mutual imports and exports. The idea of bypassing the inevitable dollar is therefore gradually gaining ground.

As for the current level of US debt, the slippage continues in line with Western countries. With a debt-to-GDP ratio peaking at 137.2% in 2021, its highest level ever, the US is fragilizing its economy. Even if US interest rates have recently become more generous than in Europe or China, Uncle Sam’s over-indebtedness does not really argue in favor of its currency.

All these phenomena and effects, which are taking place in front of our eyes, are probably the first signs of  a reign end.

Moreover, the dollar weakness which is taking place in the long term, is certainly favorable to the American economy; as long as it does not generate an uncontrolled element favoring the slippage of inflation.

Thus, we can predict, at least initially, that the newly emerging alliances will lead to a multi-polarized world where no single major Power will be able to dominate the world.

That said, in a changing geopolitical paradigm, currency allocation outside of a base/core currency exposure becomes crucial. While currency diversification brings volatility without necessarily optimizing asset returns, we believe that the risk of a dollar devaluation will influence the approach to currency allocation in the future.

In addition to a weighting in favor of the Chinese yuan, we believe that an exposure to the Australian dollar presents an excellent risk/return profile. Rich in raw materials, Australia is also  close to the world’s most dynamic economic zone (Asia-Pacific) and should benefit from these geopolitical changes. The Swiss franc and precious metals, the eternal safe havens, offer interesting alternatives.

Laurent Perusset

Chief Investment Officer

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