The era of collaboration is officially over, as a fast-reshaping new world order leads to a widespread bond portfolio shift, according to Geneva-based wealth manager Pictet.
“We’re moving from a place where countries and economic blocs were collaborating with each other to where everything is divided by and negotiated between one country and another,” says Alexandre Tavazzi, head of the chief investment office and macro research at Pictet Wealth Management.
This “turning inward” phenomenon, which began with the administration of Barack Obama, is now gaining pace under the leadership of President Donald Trump, he says.
Under his tenure, Mr Obama stressed the importance of decreasing US reliance on oil from geopolitically unstable regions, especially the Middle East.
We’re moving from a place where countries and economic blocs were collaborating with each other to where everything is divided by and negotiated between one country and another
The US increased its crude oil production and became the world’s largest natural gas producer by 2011, reducing the “strategic necessity” of military entanglements in oil-producing countries like Iraq.
“Then, in Trump 1.0, he said to China, ‘we are going to restrict the export of semiconductors to you’,” says Mr Tavazzi. This increased the need for the US to develop its own technology ecosystem.
President Trump’s unprecedented tariffs accelerated the period of entrenchment that had already been there, he adds.
Shifting capital flows
This shift is not only geopolitical, but fundamentally financial. Globalisation allowed the US to outsource production, leading to persistent trade deficits with countries like China. In turn, these “surplus nations” recycled export earnings into US Treasuries, effectively financing America’s fiscal deficit.
“You cannot change trade flows without changing financial flows,” says Mr Tavazzi. “China was, in a sense, financing its main client.”
Trade wars weaken this dynamic. Lower trade surpluses mean less foreign appetite for US debt, raising questions about how the US will continue to fund its own deficit, which is at the heart of Pictet’s new investment paradigm.
There are several risks associated with this new climate, believes Mr Tavazzi. While he expects only a 1 per cent decline of the dollar over the next decade, he is more concerned about a new risk highlighted by the war in Ukraine. Central banks that hold dollar reserves may suddenly lose access due to sanctions, highlighting the vulnerability of relying on currencies controlled by geopolitical rivals.
This has driven central banks to diversify into assets such as gold, which lack liability, and has risen despite higher interest rates. Along with the US, fiscal deficits will also plague the UK and France, says Mr Tavazzi.
As a result, investors are seeking ‘real assets’ to hedge against currency and sovereign risk, resulting in a major challenge to the traditional 60/40 model portfolio. Inflation, combined with these fiscal problems mean stocks and bonds are also more correlated, reducing diversification benefits. Currency management is also increasingly crucial.
To adapt, portfolios should include non-correlated assets such hedge funds. Within bonds, credit from financially strong companies, sometimes borrowing cheaper than their own governments, offers a compelling alternative to sovereign debt.
Fixed income shake-up
“I think the ‘term premium’ is coming back,” reflects Mr Tavazzi when discussing fixed income, referring to the additional return investors expect for holding longer-term bonds compared to a series of shorter-term bonds over the same period.
Long-term yields have risen sharply. In the UK, 30-year borrowing costs went from 1 per cent to 5 per cent, in the US from 2 per cent to above 4 per cent, he says.
However, “the term premium is not sufficient”, offering only 50 to 80 basis points of compensation for the risk of holding long-term bonds. Because of this, Pictet currently prefers a short duration in fixed income until “the price is right”. Mr Tavazzi advises investors to focus on “private balances”, favouring credit over sovereign bonds and to keep sovereign maturities short while fiscal risks remain underpriced.
Clearly, we are in a period of US retrenchment from the international scene. America First is leading to less multilateral engagement
He also points to a clear paradigm shift in Europe’s revival story. The Munich Security Conference earlier this year sent a strong message, signalling that geopolitical risks are now largely Europe’s responsibility. This wake-up call has driven European leaders to act decisively. Germany, for instance, abandoned its constitutional debt brake, a move Mr Tavazzi calls “not a small thing”.
A reversal in fortunes means countries once viewed as Europe’s fiscal challenges — Italy, Spain, Portugal, and Greece — are showing improvement. Italy is expected to return to a 3 per cent budget deficit by the end of the year, and Greece is repaying IMF loans early, a remarkable turnaround.
European growth
Germany’s shift from relying on cheap Russian gas to investing heavily in its infrastructure signals new growth. Mr Tavazzi forecasts nominal European growth of around 4 per cent over the next decade, above long-term expectations, which is positive for companies.
François Savary, founder of Genvil Wealth Management in Geneva, offers a nuanced take on today’s geopolitical realignment. “Clearly, we are in a period of US retrenchment from the international scene. America First is leading to less multilateral engagement,” he says.
Yet he adds that regional blocs are starting to respond to the vacuum: “There are signs of a move towards more collaboration. I would consider that both forces — retrenchment and collaboration — are at play.”
Europe, notes Mr Savary, faces both economic and geopolitical threats from US disengagement, particularly around trade and Nato’s future role. Still, he sees the continent responding robustly.
“Europe is never better than when under threat,” he says. Initiatives like a European defence plan, continued support for Ukraine, Germany’s fiscal shift, and progress on Mario Draghi’s economic proposals suggest a renewed willingness to strengthen the bloc’s cohesion and potential.
But he also warns of a political wild card: “Populism could become more of a problem in the coming years for those who want to move ahead.”
Asia, meanwhile, could benefit from de-dollarisation trends and a more prominent Chinese role in shaping a regional monetary system. “The US trade policy could induce countries to reinforce bilateral economic ties through regional institutions,” Mr Savary says. But Asia remains deeply exposed to US–China tensions: “Adverse forces could make these processes quite erratic.”
