Monthly Barometer June 2019

  • It is increasingly evident that trade and geopolitics are throwing a major spanner in the works of global economic growth, affecting in particular manufacturing and investment (both contracting around the world). The World Bank just downgraded its forecast for global growth to 2.6% in 2019. An economic and tech iron curtain is now descending on the globe, with trade and tech being weaponized - mainly, but not only, by the US administration. This creates considerable uncertainty for investors and businesses because nobody knows from where the next hit is likely to stem.
  • Against such a backdrop, it is no surprise to see the wave of global monetary easing gaining momentum - so much so that the value of negative-yielding bonds now amounts to an all-time high of USD12.5tr. As it did in 2016, today’s search for yields is inciting investors to take ever-greater risks, leading to situations where liquidity can suddenly dry up – as has just happened with funds (like GAM Holding or H2O Asset Management) that are struggling to return money to investors at a time when global liquidity has never been so abundant… The most troubling sign? Despite interest rates at rock bottom levels, businesses are not investing.
  • Remember ‘Chimerica’ - the notion that China and the US were so intertwined that they would end up forming just one entity? The assumption that the world they created was our inevitable future became so entrenched in the minds of most decision-makers that it became one the central tenets of the investment world… until it ceased to be. Irrespective of how trade negotiations turn out, the Sino-American rupture is a reality. As the two countries decouple, economic, societal and geopolitical consequences will be dramatic and far-reaching, affecting their relations in domains as diverse as trade, capital flows, tourism and education. There will inevitably be many spill-over effects on the rest of the world.
  • Emerging markets may well be the greatest casualty of this current maelstrom. Until recently, the case for investing in them was predicated upon the fact that they were growing much faster than high-income countries. No more. When China and India are excluded, growth in GDP per capita (when measured in PPP terms) is slower in emerging economies than in high-income ones. Mature economies are in search of a new growth model (less consumerism, environmental concerns) that will slow down export-driven emerging economies - a situation now exacerbated by trade tensions, rising doubts about integrated, just-in-time supply chains, and technological innovation in general.
  • The above applies to companies as well. In this new nationalistic, fragmented, world, global value chains are going to pose multiple problems for large conglomerates, and could even make them obsolete. Going forward, global, ‘cosmopolitan’ companies will be exposed and vulnerable because their core business model (different countries specialising in different parts) risks no longer being viable.
  • When we reject silo thinking and start connecting the dots between economics, geopolitics, societal issues, the environment and tech, a picture of a disorderly world emerges with force. Rising risks in these 5 macro categories conflate and amplify each other, making the world unpredictable and ever more dangerous. Take geopolitics as an example: because of (1) the lack of global governance, (2) the absence of a “Concert of Nations”, (3) the US current “Jacksonian impulse”, (4) the ever-present risk of miscalculation, all the major international crises of the moment (like Iran and the South China Sea) could spin out of control. If they do, this would cascade and inflict considerable damage in the other macro categories.
  • June’s most notable geopolitical development was the significant rapprochement between China and Russia. The two countries have strong historic animosities and it’s hard to tell how this partnership will evolve and what effect it will have on the West in general and the US in particular. Long-term and direct investors must remember that demographic is one of the most important drivers of geo-economic trends. Relative to its main rivals, the US is in a rather enviable position, and, albeit to a lesser extent, so too is Europe. Unfavourable demographic trends will soon create major headaches (and headwinds) for the Chinese economy. These will be much worse for Russia.
  • Some analysts claim that threats of ‘cyber MAD’ are progressively replacing ‘nuclear MAD’. The fear of nuclear annihilation (MAD: Mutually Assured Destruction) kept the world safe during the cold war, but it is different with cyber, which contrary to nuclear deterrence fills a large grey, indeterminate space between war and peace. The only certainty: an escalation is underway. The US just let it be known that it had launched digital attacks on Russia’s electric grid and Iran’s missile systems.
  • Velocity versus sustainability – we normally assume that e-commerce is ‘good’ for the environment because it reduces our carbon footprint (one truck delivering many parcels seems more ‘sustainable’ than many consumers shopping around in cars). This is less and less true because our obsession with velocity collides with our efforts to reduce carbon emission. Amazon’s decision to accelerate Prime shipping from two days to one and to offer free shipping for just one purchase will inevitably be emulated by competitors (Walmart and others), meaning that there’ll be many more trucks on the road and planes in the air. The antidote to this “always-on – always now” culture will be found in economic activities that allow us to slow down – they remain niche but are growing very fast.
  • The issue of decision-making in a quantum world was at the core of our recent Armenian Summit of Minds. In a quantum world, change comes fast and in unpredictable ways. Coping well with such an environment depends on two core attributes: (1) the on-going ability to learn and to adapt; (2) the realisation that in a data-centric planet and tech-obsessed world, personal relationships and the ability to engage with diverse networks matter more than ever. In conclusion: mental agility is everything and being small (as a country, an institution or a business) may give you an edge because it makes it much easier to adapt.
  • All the above is a mile-wide and an inch deep. For the opposite: a mile deep and an inch wide, real-time, in-depth analysis of any of the bullet points above, please contact us and gain access to an unrivalled network.

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Posted by Carolina

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