To begin this week’s newsletter, we look at the economic prospects of the US and Europe, highlighting that they seem to be going in opposite directions as well as the potential for new technologies to change this dynamic. Then, we examine the return of stock buybacks and the benefits of commodity allocation in one’s portfolio. We then move to a discussion of Xi’s recent trip to Europe in the light of increasing trade tensions between the China and the EU. To end this week, we evaluate the apparent growing trend of deglobalization, a worrying pattern of increasing fragmentation in both the geopolitical and geoeconomic realms.

The Inverse Trajectories of Europe and the US

America is in the midst of an extraordinary startup boom

The Economist

Can Europe’s economy ever hope to rival the US again? 

Martin Arnold, Sam Fleming, & Claire Jones, Financial Times

America is experiencing a startup boom. Business applications, a strong indicator of startup activity, skyrocketed in mid-2020 and haven’t slowed down much since. This surge extends beyond the initial pandemic-driven ventures – there’s a clear shift towards technology startups, with a recent boom in AI-related businesses reminiscent of the 1990s tech boom. This entrepreneurial revival is being fueled by a few different factors: The pandemic itself, with its remote work revolution, pushed many to take the plunge into business ownership. A robust job market provides a safety net for aspiring entrepreneurs, and the rise of new technologies like AI offers fertile ground for innovation. Notably, this boom isn’t limited to tech hubs like Silicon Valley. Smaller cities across the country, from Boise to Greenville, are experiencing their own surge in startups, thanks in part to the appeal of remote work and the advantages of a smaller, more nimble business environment. While the long-term impact on productivity remains to be seen, the current trend is encouraging. The influx of new companies, particularly those focused on technology and innovation, has the potential to revitalize the economy and propel future growth. It might take some time for these startups to fully mature and make their mark, but America’s entrepreneurial spirit appears to be alive and well.

Meanwhile, Europe’s economic prospects are not as strong, especially weakened from the dual crises of the pandemic and the Ukraine war. The US economy has bounced back much faster, with GDP growth more than double that of the Eurozone. This divergence is causing a rift in monetary policy, as the US Federal Reserve is expected to raise rates less aggressively than the European Central Bank. Several factors contribute to Europe’s underperformance: Weaker consumer demand, lower investment, and labor hoarding have all hampered growth. European households are more exposed to rising borrowing costs due to shorter-term mortgages, and people are choosing to work fewer hours. The aging population is another burden, with a shrinking workforce and lower birth rates. The US, on the other hand, benefits from a perception of stronger business dynamism, a more pro-entrepreneurial environment, and an objectively larger share of large, high-growth companies. This has led to a significant productivity gap between the US and Europe. Additionally, US investment in areas like IT has been much stronger. While Europe recognizes the need for growth, some policymakers question the sustainability of the US model, fueled by high deficits and loose fiscal policy from both major political parties. Despite the challenges, there are glimmers of hope for Europe. The Eurozone economy showed signs of a rebound recently, and AI presents a potential opportunity to boost productivity. Europe faces several hurdles to close the economic gap with the US for which it must address these structural issues and embrace innovation.

The Return of Buybacks and the Power of Commodities

Buybacks Are Back: Corporate America Is on a Spending Spree 

Charley Grant, The Wall Street Journal

The power of a commodities allocation: A little goes a long way

Bloomberg Professional Services

US companies are optimistic about the future and splashing out on share repurchases, which is fueling the stock market. Big names like Apple and Meta are buying back billions of dollars’ worth of their own stock, at a pace 16% higher than last year. This surge in buybacks follows a dip in 2023 due to recession fears, but the economy has remained healthy and earnings are growing. Many analysts see buybacks as a sign of corporate confidence and a way to boost per-share earnings. While some warn that buybacks can signal a slowing business, for many companies they are part of a broader strategy to return value to shareholders. This includes initiating dividends and ongoing investments in new, promising areas like artificial intelligence. Many experts believe that the strong spending by US companies is a positive sign for the stock market and the economy.

As corporate buybacks are powering the stock market, many investors are reexamining another asset class: commodities. A recent report by Bloomberg reported that, as of January 2024, asset allocation to commodities stood at only 1.7% of portfolios. Experts say that may be too little. Commodities have widely-understood benefits, including diversification and protection against inflation (as they did in 2022, where commodities gave positive returns compared to lackluster equities, bonds, and elevated inflation), and some analysts say it may be time to add to them during a period where equities and bonds are strong, as commodities could lead to enhanced returns and lower volatility. Studies suggest that an allocation of 4%-9% of commodities in a traditional 60/40 portfolio, depending on one’s risk tolerance and desire for protection against inflation. In sum, a little goes a long way in diversifying one’s portfolio, hedging against inflation, and seeking enhanced returns.

Xi in Europe

Xi is probing for cracks in the EU and Nato

Financial Times

China makes Hungary a model for diplomatic ties in Europe

Financial Times

Europe faces up to China’s EV dominance as carbon-zero targets loom

Nikkei

Chinese President Xi Jinping recently embarked on a tour through Europe, visiting France, Hungary, and Serbia, as the continent grapples with the growing dominance of Chinese electric vehicles (EVs) amid looming carbon-zero targets. European auto manufacturers are faced with a critical decision: whether to confront or collaborate with their more affordable Chinese counterparts— especially BYD. While Europe has welcomed Chinese investment into its EV industry, it has also expressed concerns about the influx of Chinese EV imports, given China’s production dominance and competitive pricing advantage. As European nations set ambitious targets to boost EV sales, they’ve acknowledged the significant challenge posed by China’s advanced position in the market. Amidst debates over tariffs and trade policies, the European Union has sought to balance the need for domestic EV production with concerns about market distortions caused by Chinese subsidies, highlighting the battleground for competition and collaboration between European and Chinese manufacturers. France, one of the countries that Xi visited, has provided China with a voice independent of the US in Europe, which seeks greater European autonomy but is also fearful of Chinese imports. In fact, France strongly and successfully lobbied the European Commission to launch a competition inquiry into Chinese EVs. 

In Budapest, Xi elevated China’s relationship with Hungary to a model for diplomatic ties in Europe, signaling its intent to reward loyalty with investment and trade opportunities. This strategic move positions Hungary as a key member of Xi’s envisioned “circle of friends,” those nations aligning with China’s geopolitical interests and receiving preferential treatment in economic cooperation and diplomatic support. Despite Hungary’s NATO and EU membership, Prime Minister Orbán’s independent foreign policy stance and willingness to defy great power politics have endeared him to Beijing, leading to substantial Chinese investments totaling €16bn and solidifying Hungary’s status as an “all-weather” partner for China. Orbán’s alignment with China’s positions on global conflicts further disrupts European unity, signaling China’s rising confidence in shaping a new global order through strategic partnerships and economic leverage.

Deglobalization Threatens Global Stability

The world’s economic order is breaking down 

The Economist

How crises reshaped the world financial system

The Economist

The movement of capital globally is in decline

The Economist

As of April, the US has vetoed 75 straight motions aimed at filling vacancies within the World Trade Organization (WTO), effectively paralyzing its dispute-resolution mechanism and tearing down one of the global economic pillars it built after World War II. This obstructionism signifies a troubling departure from the principles of free trade and globalization towards a system characterized by deglobalization. Recurrent crises, like the 1997-1998 Asian Financial Crisis, coupled with the West’s inability to manage their repercussions, have spurred middle-income countries to bolster their domestic capital markets and shield themselves from the volatility of international capital flows. Consequently, parallel financial systems have emerged, operating beyond the traditional purview of Western controls and reshaping the global financial architecture, alongside China’s rise and Russia’s strategic circumvention of Western financial systems.  

Amidst the general decline in global capital movement, geopolitical tensions—particularly between the US and China—have played a pivotal role. Foreign direct investment (FDI) from the US to China has waned due to heightened national security concerns that have outweighed free trade principles in terms of policy decisions. While FDI to the US and EU remains relatively steady, the overall reorientation of capital flows has led to a significant drop, from FDI constituting 3.3% of global GDP in 2018 to a mere 1.3% in 2023. Lower-income economies are disproportionately affected by this shift, lacking the domestic financial infrastructure to navigate the realignment between the West and China. Additionally, the rise of industrial policy and the erosion of global institutions like the IMF and WTO reflect a shifting global landscape towards protectionism. Initiatives such as the CHIPS Act in the US underscore this trend, prompting retaliatory measures and hindering efforts toward global economic cooperation and stability.