President Trump seeks to demolish Davos internationalism
Should investors worry?
President Trump's much anticipated speech at Davos confirmed what many of us have assumed, that the US will not use force against Greenland, a NATO ally. It also laid into many globalist beliefs, branding net zero policies as a "green scam", attacking Europe's continued shortfall on defending itself and saying that countries that want to shift to renewables and decarbonised industry are stupid, playing into the hands of a strong and cynical China. President Trump is still determined to get a better deal over Greenland, frustrated over the absence of agreement to end the war in Ukraine and dismissive of European dear energy and high migration policies which he thinks undermine their economies and societies. President Trump continues with tariffs as his main weapon and refuses to worry about the damage to trade and relations these cause.
By way of balance to these views, Prime Minister Carney of Canada has also told some home truths to his fellow globalists. He recognises the break down in the international rules-based system of NATO, WTO, UN and urges other middle powers to take action to protect themselves. "A country that cannot feed itself, fuel itself or defend itself has few options". He is seeking closer contacts with China, the EU and other players for Canada as he worries about how much continued trade and support he can count on from his neighbour, the USA. Mrs Von Der Leyen on behalf of the EU also thinks the "shift in the international order is not only seismic - but it is permanent" "We now live in a world of raw power". This is a strange time to announce this, as surely Putin expressed that view with force from 2014 onwards in Ukraine and China has always taken an asymmetric approach to international law. The USA has never accepted the right of international courts to dictate to it and has always had a veto on UN action. The EU proposes closer and faster European integration and wants a stronger EU military with capability in the Arctic circle to help Denmark/Greenland.
The US sphere of influence
President Trump has been clear in his foreign policy aims. He thinks Europeans should take more responsibility for their own defence. He has pushed them to increase their spending on military force and sees Ukraine as an EU problem as Ukraine is seeking to be a member and has close relations with the EU. Whilst he has not pulled the US out of NATO, he uses the full bargaining power US dominance gives to make it clear Europeans have to do much more. The US has no wish to fund or fight the war in Ukraine for them.
He has modernised the Monroe doctrine which stated that Europeans should keep out of the Americas and the US would keep out of Europe. His Monroe doctrine sees the lands from Greenland and Canada in the North to Chile in the south as an area of great strategic importance to the US where the US will intervene and influence developments.
Some think this means the US becomes a dominant regional power, but the President has been keen to set out he sees the US in a competition with China for world sway. He has not ruled out defending or intervening in Asia should China overreach. He is keen to keep Diego Garcia and other big Asian bases and to reinforce the freedom to navigate the China Sea and the Taiwan Straits. He looks to Japan to provide more support.
He now intends to heavily influence Venezuela by channelling investment and organising the oil trade and oil revenues, sharing them with Venezuela itself. He wants a new relationship with Greenland as he wishes to strengthen US/Greenland defences into the Arctic circle and to exploit the minerals there.
The Greenland problem
Greenland is a self-governing territory but also a colony of Denmark; with Denmark having powers over foreign policy, defence and providing some money. It has a population of just 56,000 people in a few small towns on the relatively ice free southwestern coastal strip. It is a huge area of land and ice sheet covering several islands in the Greenland group. The Danish King is the Head of State for ceremonial purposes. Denmark sends an annual grant to assist the Greenland economy. Greenland has two representatives elected to the Danish Parliament. Most Greenlanders want to be independent of Denmark, but do not want to become a state of the USA.
During the Second World War the US sent a military force to Greenland to prevent German occupation at a time when Denmark had been incorporated into the Third Reich by force.
Greenland has a defence agreement with the USA. There is an important US military base on the islands. The US would like to strengthen its defences in the area given Russian and Chinese interest in the Arctic Circle. The US sees the oil, gas and minerals potential as a way to pay for the defence and to improve the incomes of local people. Greenlanders are in the main opposed to a big increase in commercial exploitation of natural resources. Most of the deposits are well away from the small populated coastal strip in the southwest corner.
The main European allies of the US have said the US should rule out any idea of sending in forces to take charge of a democratic member of NATO. There are diplomatic possibilities to improve the US offer of defence support and to find some agreement on joint economic development. Given the wish of many Greenlanders to be free of Denmark they would need more revenue to replace the Danish grant. With agreement it would be possible to settle many new people in Greenland well in excess of current population numbers to boost investment and output. President Trump was accompanied in Davos by Trade Secretary Lutnick and Treasury Secretary Bessent. The Secretaries were measured and keen to engage in negotiations to seek to find a way round a tariff war over Greenland's future.
The Chinese sphere of influence
China joined the World Trade Organisation in 2001 on favourable terms. It gave China easy access to lucrative Western markets whilst allowing a variety of restrictions and obstacles to trade to still be imposed on Western exporters to China and investors in China. China has used the last quarter of a century well, to accelerate growth and to build its Belt and Road initiative. This has meant investing in crucial infrastructure in a wide range of countries between China and the West, gaining profitable contracts, creating plenty of Chinese jobs and securing influence over those countries.
China has tightened its control and restricted democracy in Hong Kong after negotiating a transfer based on promises to keep the freedoms of the previous system going. China has built settlements and facilities on small islands and atolls in the China Sea to claim much greater sway over the whole area. China is building a huge military including amphibious capability of the kind needed to invade Taiwan.
China has seen Russia's difficulties in trying to secure Ukraine and has used these to strengthen its dominant position in the Sino-Russian alliance. It has helped it secure more cheap energy and more markets for its military and manufactured products. China has increased its influence in the Middle East with strong links to Iran and its proxies. China's reach also stretches into Latin America via Cuba, and it was close to the Venezuela dictator. China wishes to be the world's dominant power and has almost four times as many people than the US as a help. However, China remains respectful of US technology and military reach.
Likely developments
Geopolitics remains an important backdrop to investing. It is unlikely there will be war between the US and Russia, let alone China. It is proving difficult to resolve war with Ukraine as Russia still thinks there is gain to be had by continuing the murderous conflict, relying on the inability of the Europeans to marshal enough money and force to give Ukraine a victory. The US is unlikely to invade Greenland but will intensify diplomatic pressures to see if there is a deal to be done on defence and minerals. China will continue to menace Taiwan but will not invade given President Trump's new belligerence. There will be further action by the US to enforce sanctions more strictly.
The Canadians and Europeans are overstating the seismic change they see. Over the last decade it has been quite clear Russia, China, Iran, North Korea and others have always reserved their claimed right to exercise raw power and have applied world rules only when it suits them. Over the next decade there could be further large changes in US policy under President Trump's replacement. The biggest change being brought about by President Trump is to energy, where he has given a big boost to fossil fuels alongside the use of them in China, Russia, India, Brazil and other big markets. This has helped strand the EU and the UK with dear energy and with a big demand for imports of green products from China. Meanwhile the US giant companies in digital technology have extended their lead on the rest and dominate world stock markets and economies.
On these assumptions share markets can make more progress for investors this year. The announcement of a massive increase in defence spending by the US is providing a further boost to the defence sector which has been doing well on better prospects for orders for some time. Adding Venezuelan oil to western sources and building up the flows will help prevent big upward moves in energy prices to worry Central Banks about inflation. There are some signs that inward and domestic digital investment is giving the US a substantial productivity boost, with the US representatives at Davos particularly bullish about likely growth this year for their own economy.
About the author
The Rt. Hon Sir John Redwood has been a long-standing member of the EPIC Investment Partners Advisory Board.
John is a well known commentator on governments and economies, with long experience of investment markets. Trained as an analyst at Robert Flemings, he moved to N.M. Rothschilds where he became a Manager and Director of pension and charitable funds and Head of Equity Research. He was seconded to become Head of the Downing Street Policy unit before chairing a large, quoted UK industrial business. He served as an MP and a government Minister.
In 2007 he set up Pan Asset with a colleague, an investment management business that pioneered active/passive funds and models in the UK. Following the sale of the business to Charles Stanley, a quoted investment manager in the City, he became their Global Chief Strategist advising on non-UK markets and economies. He also ran a demonstration fund for the FT, writing articles about it and illustrating the use that can be made of ETFs in portfolios.
He is now an adviser to EPIC, providing insights into the big investment issues of the day from the debt and spending problems of the major governments to the green and digital revolutions which have so much impact on equity markets. He is a Distinguished Fellow of All Souls College, Oxford, where he helps with their Endowment investments and gives occasional lectures on modern economics and politics.