In terms of current geopolitics, this year’s U.S. election is particularly critical, as the Democrats look to redistribute wealth, after a huge increase in wealth due to low taxes and free-trade agreements over the past 40 years.

Similarly, the Republicans are also arguing that wealth redistribution should happen but through trade tariffs and restricting immigration, in the belief that by doing so, it will increase the real wages of U.S. workers. Matt says these are two very different forms of wealth redistribution that U.S. voters will be asked to choose from.

However, modelling from BCA Research currently has Biden narrowly holding onto the Presidency, with the Democrats retaining control of the White House with 277 electoral votes (270 to win).

“We slightly favour the incumbent President with a 55 per cent probability of retaining the Presidency, but that’s based on a low conviction probability and we may have to change that view if the unemployment rate rises more than 0.5 percentage point or something else happens that keeps Biden’s approval rating stagnant around the 40 per cent range,” says Matt.

In addition, analysis by BCA Research has the Republicans achieving a majority in the U.S. Senate, with the Democrats losing control of the Senate with a 48-52 minority.

According to Matt, based on these predictions, if Biden does return to the White House he will likely face gridlock in Congress. However, this is a status quo situation and is relatively benign for financial markets.

“There is unlikely to be any major changes to U.S. fiscal policy and Biden has shown no inclination to tamper with monetary policy. His trade policy is aggressive, particularly towards China, but he is also more measured with that aggression with U.S. allies,” says Matt.

“The big risk of a Biden victory is that he will double down on the Ukraine war, but other than that it’s a status quo environment that is not particularly harmful for investment sentiment.”

Diana believes it probably doesn’t matter whether Biden or Trump wins. She says both the Republicans and Democrats have a ‘hawkish’ stance on China, which will continue.

“Trump is talking about potentially introducing a tax of 20 per cent on all Chinese imports, and the Democrats are also hawkish on China. I don’t know whether Trump will go through with his threat, given that it will mean higher inflation for the U.S. and potentially no interest rate cuts,” she says.

“Trump is also talking about reversing some of the tax hikes that are scheduled to be implemented next year, which will be positive for sharemarkets. However, in terms of how sharemarkets react to the U.S. election, I really don’t think it matters who wins. There won’t be a massive reaction one way or the other, because there are so many offsets to the outcome, even if Trump wins.”

According to Matt, the macro backdrop for China is very negative. He says China is not pursuing the structural measures needed to encourage the private sector — households and businesses — to spend and borrow, which would help stimulate the economy.

“You do not see the privatisation of companies or the type of stimulus investors are hoping for that would provide temporary support. So, when you’re in a debt deflation trap, and you are already easing monetary policy and you’re already running large budget deficits, the stimulus would have to be very dramatic in order to accelerate the economy.

Stimulus will elevate China to its potential GDP growth rate of about 4-5 per cent, but it won’t accelerate the economy above that.”

According to Matt, in order for China to re-accelerate, it needs to increase its productivity. It is hoping that by reinvesting in science, technology and R&D, it will be able to generate a productivity boom.

However, the U.S. and its allies will try and restrict China’s access to semi-conductors, which are essential for most of the technologies China wants to produce in order to increase productivity.   

Undoubtedly, China will continue to exert economic pressure on Taiwan as a means of undermining its President, who is pro-independence.

“I believe China is likely to use hybrid or ‘grey-zone’ military activity to try and take small chunks of Taiwanese territory, like offshore islands. This will escalate conflict over the coming years, but it won’t be a full scale war,” says Matt.

“Essentially, through this action, China is signalling to the Taiwanese people that not only are they losing economic growth because they’re not doing what China wants them to do, but they’re also at risk of losing their territory. Ultimately, China will hope this action will achieve an electoral outcome in the 2026 and 2028 Taiwanese elections that is more favourable to China.”

However, if there is an escalation of conflict between China and Taiwan, the U.S. is most likely to provide Taiwan with considerable support, including weapons.

“What we have is an environment where the Taiwan issue will continue to fester, which will also continue to discourage Western capital from rushing back into China.”

If you’re thinking that Chinese equities are cheap and you want some exposure to China, Matt doesn’t believe the timing is appropriate yet. However, he does believe that under either Biden or Trump, the U.S. and China could create a diplomatic framework where they ‘agree to disagree’ on Taiwan — essentially, agree not to have a war over Taiwan.

And whilst such a framework could be in place by 2026 or 2027, Matt adds that most likely, tensions will continue to rise before any major diplomatic understanding is established. Therefore, Chinese equities could continue to have a very high risk premium, suppressing their valuation.

Looking to the Middle East, Matt says this region remains highly unstable and a significant geopolitical risk. And whilst there will eventually be a ceasefire in Gaza, when Israel believes it has achieved its objective of decreasing Hamas’ military capability, Matt believes it will be at this point when the Netanyahu coalition will start to fall apart.

Netanyahu’s position as Prime Minister is likely to come under increasing pressure, as he is blamed for not having a reconstruction plan for Gaza and for the October 7 attacks.

“However, if there is a move to remove Netanyahu, he could become more aggressive towards Hezbollah in southern Lebanon, in order to allow Israeli citizens to return to northern Israel. This is a risk we need to be aware of.”

Matt says while such a conflict will not affect global oil supply, it will raise tensions in the Middle East and bring both Israel and Iran closer into direct conflict, as Iran will support Hezbollah.

“Ultimately, the driver of this conflict is Iran’s pursuit of nuclear weapons,” he says. “Iran has enough highly enriched uranium to build seven nuclear bombs. Iran could possibly develop a deliverable nuclear weapon within 12 months, which could force the U.S. and Israel to take action — military, cyber, sabotage — against Iran to prevent this from happening.” 

With territorial gains in parts of eastern Ukraine and his re-election to the Presidency of Russia, Putin has maintained his image as the strongman of Russia. However, Matt believes there are tough times ahead for the country. He cites a shrinking labour force, a slowdown in productivity growth, and significantly reduced foreign investment.

“Russia will enter into a very dangerous economic decline,” says Matt. “With Russia’s aggression towards Ukraine, Europe will continue to spend more on defence. Europe understands that internal Russian instability leads to external Russian aggression. So, rearming could help stimulate Western European economies.”

However, as the West stands up to both Russia and China, Matt believes that will naturally drive both of these countries closer together. He says that will be the major reason preventing the U.S. from establishing a new and deep re-engagement with China.

“Even if the U.S. and China agree not to go to war over Taiwan, they will not be re-engaging their economies. That’s because from a geopolitical perspective, the U.S. cannot funnel capital and technology into China when Beijing is seen as a military adversary and is allied with another major military power, Russia.”

During this period of extreme uncertainty, Matt believes investors should remain overweight U.S. assets, which have generally outperformed. This includes the U.S. dollar, which remains relatively resilient.

However, he cautions that if Trump wins the Presidency and the Republicans gain control of both houses of Congress, we are likely to enter into a very inflationary period of policy over the next four years, which could lead to a big sell-off of the U.S. dollar, U.S. bonds, and U.S. stocks. 

“But remember, while there are serious risks to U.S predominance in the market, during a period of uncertainty and where conflicts have not been resolved, we will continue to see U.S. assets as safe havens.”