It’s the end of the world as we know it (and markets feel fine)

“The days of principles are gone” - Prince Schwarzenberg discussing the end of the Metternich era in a letter to his employer, Austrian Ambassador Baron Hubner in 1851)

“It is the rational optimist who fails, the irrational optimist who succeeds, for he is ready to smash the whole universe for the sake of itself.” - GK Chesterton

 

The Geopolitical Risk Premium

In the aftermath of Vladimir Putin’s invasion of Ukraine in February 2022, geopolitics became a hot topic among investors. To paraphrase Leon Trotsky - one of the architects of the Russian Revolution who later became a critic of Stalin and was assassinated in exile – investors in Europe and Asia may not have been interested in war, but war was certainly interested in them. As a result, markets began applying a so-called “geopolitical risk premium” to international equities.

If the equity risk premium represents the additional return investors expect over the “risk-free rate” (government bonds) to compensate for equity risk, the geopolitical risk premium accounts for the uncertainty arising from ongoing (Ukraine) or potential (Taiwan) conflicts. While difficult to quantify, analysts have estimated this premium at 1–2% for European equities, reflecting both the real costs to European companies and consumers - such as higher energy prices - and the risk of prolonged conflict. In Asia, a de facto cold war and uncertainty over China’s intentions regarding Taiwan led to an estimated geopolitical risk premium of around 2%.

 

International politics at the end of the Biden era: the center cannot hold

An elevated equity risk premium in the final years of the Biden administration reflected not just regional crises like the war in Ukraine but also a broader deterioration in international relations that had been decades in the making. It is reasonable to argue that, in the wake of the collapse of Iraq (cost: 300,000 dead, $3 trillion), Libya, and the chaotic withdrawal from Afghanistan (cost: 170,000 dead, $2 trillion), trust in America’s foreign policy establishment -dominated by neoconservatives from both parties since 9/11 - had eroded significantly.

For both the right and the Global South, as well as their sympathizers on the left, slogans such as “nation-building” and “making the world safe for democracy” had long begun to sound hollow - if not outright Orwellian. Not only had the neocons left a trail of destruction with their “forever wars,” but an age of increased transparency - both unwelcome, as with Wikileaks' revelations, and inevitable, as the internet made information harder to control - had unraveled their narratives.

Historian Niall Ferguson, on the right of the political spectrum, even compared the U.S. position to that of the Soviet Union in its final years under Brezhnev[1]. The revelation during the first 2024 presidential debate that then-President Joe Biden, a frail and absent-minded octogenarian, was not fully in charge -just as the narrative around the Ukraine war was unraveling - only reinforced this comparison.

 

Trump II: Bismarck or Napoleon III?

At a moment when both the internationalist and neocon narratives have collapsed, in comes Donald Trump—like a bull in a china shop—with an opportunity to reshape the international order. A useful historical parallel here is the mid-19th century, which, much like today, saw the transition from one system of international relations to another. The catalyst was the Crimean War and the collapse of Metternich’s Concert of Europe, a system in which international relations were dictated by a coalition of like-minded (anti-liberal) rulers. Into the void stepped two very different leaders: France’s Napoleon III and Prussia’s "Iron Chancellor" Otto von Bismarck.

Napoleon III, known as "the Sphinx of the Tuileries," attempted to redraw the map of Europe without a coherent grand strategy, instead seeking to dazzle the public with short-term tactical victories. This approach ultimately backfired, strengthening his enemies and isolating France. Bismarck, in contrast, is widely credited by historians for establishing a new order through a series of strategic alliances—many with names that sound like Marvel comic book titles—such as "The League of the Three Emperors" (1873), the "Dual Alliance" (1879), and the "Triple Alliance" (1882). These treaties, unburdened by ideology or political kinship, allowed him to maintain peace in Europe by creating an (albeit fragile) balance of power.

Napoleon III, in true Bonapartist fashion, was drawn to imposing universalist principles on the world but lacked the power to do so. Bismarck, by contrast, relied on pragmatism and the ability to exploit every available option without ideological constraints. He based Prussia’s claim to leadership on sheer strength rather than on universal values. Incidentally, he also had a penchant for using tariffs as a bargaining tool.

While it is still early in the second Trump administration and much could go wrong, I would wager that Otto von Bismarck would approve of the message in Donald Trump’s The Art of the Deal.

 

An optimistic view: ambiguity as a playground

Amidst a flurry of headlines about tariff wars, territorial expansion, and bureaucratic retrenchment, it is tempting to believe that entropy has set in. However, despite the chaotic news cycle, five core tenets of Trump’s foreign policy can be discerned - principles that could, in time, lead to a new order.

The first, as Marco Rubio recently stated in an interview with Megyn Kelly on Fox News, is America’s acceptance of the end of unipolarity. This paves the way for a second principle, rooted in international relations theory: realism, or realpolitik—the recognition that power, rather than principle, drives international affairs.

The third tenet, which I would call the "Hegseth Doctrine" after the new Secretary of Defense, reflects a preference for limited aims backed by overwhelming force. The fourth is a shift toward public declarations of America’s national interests and an abandonment of lofty universalism - think "We want Greenland" instead of covertly fostering Orange Revolutions in former Soviet states.

Finally, the fifth principle is the desire to clip the wings of the so-called "deep state"—the entrenched network of intelligence operatives, bipartisan politicians, career civil servants, academics, and NGOs that embodied the neoconservative consensus. One part of this is the public investigation and exposure of the ancient regime’s past sins, as recently advocated by  Peter Thiel in an editorial in the Financial Times[2]. The other part is the analysis of the money trails financing the deep state, as conducted by DOGE.

Whether these principles - espoused in typical Trumpian fashion through public cajoling and bargaining - will lead to a new order remains up for debate. While Trump exhibits a Bismarckian audacity in confronting the past and embracing realpolitik, he risks coming unstuck if his actions fail to coalesce into a coherent grand strategy. That said, when it comes to Ukraine and China, I would wager that the odds are in his favor. In Ukraine, initial signs point to a negotiated settlement that balances Russia’s territorial ambitions with Ukraine’s security, while also addressing Europe’s economic needs - potentially reopening Russian gas supplies to bail out an exhausted industrial base. In China, a "Mar-a-Lago Accord" covering trade and capital flows could be accompanied by a Nixonian bargain on Taiwan - effectively putting the issue on ice for another decade or two under an implicit don’t ask, don’t tell arrangement. In this scenario, Trump would transform the crisis caused by the decline of U.S. unipolarity into a new, "realist" order - one that prioritizes balancing the competing interests of major powers over ideological principles. Or, as the legendary Israeli diplomat Abba Eban put it, "behaving wisely after all other options have been exhausted."

 

Opportunities in European and Chinese equities

Financial markets have a tendency to "sniff out" major turning points well before the news cycle catches on. After the financial crisis, markets bottomed out and began rising in 2009—just as media narratives suggested the sky was still falling. A similar dynamic appears to be at play following the U.S. election and the inauguration of Donald Trump. Both Chinese and, notably, European equities have staged a convincing rally, with the latter even reaching new all-time highs. This comes despite widespread alarmism over tariffs, U.S. policymaking, and energy prices. The rally has unfolded against a backdrop of record-low relative valuations for international equities versus their U.S. counterparts, as well as historically low investor positioning. While the political outlook remains uncertain, if Trump follows through on his intentions, I believe there is significantly more upside ahead.

 

Conclusion: Defeating HyperNormalisation

In 2016, the BBC aired a widely discussed documentary by Adam Curtis titled HyperNormalisation. The film takes its name from a concept coined by Alexei Yurchak, a Russian émigré and professor at UC Berkeley, to describe the final decade of the Soviet Union. At that time, everyone knew the system was failing, but no one could envision an alternative. As a result, both politicians and citizens maintained the pretense of a functioning society, despite its obvious decline.

Curtis argues that a similar dynamic unfolded in the West as policymakers embraced technocratic managerialism, cloaked in universalist principles. By reducing governance to a risk-management exercise, driven by increasingly sophisticated computer models, they -aided by media and academia -constructed a “fake world” in which an illusion of stability masked growing underlying turmoil.

The wrecking ball taken to this manufactured reality by the Trump presidency brings both risks and opportunities for liberation. While many in the West remain in a state of shock, Trump is being well received elsewhere - a stark illustration of the provincialism of our "luxury beliefs." It is unsurprising, then, that according to recent polls, Trump is significantly more popular in the Global South than in the developed world.

Whether the issue is territory, energy, or tariffs, the resurgence of realpolitik presents opportunities to rebalance economic relations and forge long-term win-win scenarios. China stands to benefit by reorienting its economy toward domestic consumption, alleviating its extreme trade surplus. Europe, in turn, could gain greater strategic autonomy, which might include engaging directly with Russia and China—allowing Europeans, much like Voltaire’s Candide, to be "content to tend their gardens."

What is certain is that the "geopolitical risk premium" - which has been priced into international markets over the past decade of hypernormalisation - is set to shift. I’d wager that it will dissipate, leading to international markets outperforming the U.S. in the age of MAGA - a counterintuitive outcome. But as Elon Musk himself put it, "The most ironic outcome is the most likely."

 

[1] https://www.thefp.com/p/were-all-soviets-now

[2] https://www.ft.com/content/a46cb128-1f74-4621-ab0b-242a76583105