PAR ALI AL-ENAZI

Under his tenure, Mr Obama stressed the importance of decreasing US reliance on oil from geopolitically unstable regions, especially the Middle East.

President Trump's unprecedented tariffs accelerated the period of entrenchment that had already been there, he adds.

Shifting capital flows

« You cannot change trade flows without changing financial flows. 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

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.

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.

« 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. »

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.