- The euphoria over a synchronized global upswing has expired. Global growth remains solid, but it is imbalanced and fragile: emerging markets (EM),Europe and Japan are decelerating while the US is booming at around 4%. Tax breaks largely explain this exceptional performance that won’t last beyond 2020 when the fiscal drag kicks in, bringing growth down to 1%. An oddity: despite the US economy running high at almost full employment, the Fed chairman recently said that he discerns no troubling signs of “overheating”. An explanation: the declining labour share of income means the economy does well but many people feel worse off.
- Longer term, the greatest threat to global growth remains the on-going trade war between the US and China. 3 reasons suggest this tit-for-tat is likely to escalate: (1) for both countries, the tariffs are bad but not calamitous; (2) trade spats are a proxy for the long-term struggle for techno-geopolitical supremacy; (3) domestically,neither Trump nor Xi can risk being seen as weak by giving in. Many commentators get trade disputes wrong, seeing them as a source of inflation when in reality they create disinflationary headwinds by weakening global demand.
- For Turkey, the writing of the markets’condemnation was on the wall: for more than a decade, its expansion relied on a steady flow of foreign capital financing domestic consumption and flashy investments. Today, any economy manifesting some or all of Turkey’s four main characteristics: (1) a large USD denominated debt (like Argentina: 80%), (2) a large current account deficit, (3) political interference in monetary policy and (4) rising inflation risks suffering the same fate. The most likely casualties are Chile and South Africa but large economies like India and Indonesia are also vulnerable. The bottom line: US monetary tightening will continue and hurt EM – the reduced global liquidity it entails always prompts capital flows from EM.
- The Belt and Road Initiative (BRI) – the world’s most ambitious development programme heralded as China’s conduit to global dominance – is running into difficulties. Among the 78 countries in which about USD 1.5 trillion are to be invested over the next 10 years,criticisms and resistance are mounting. The Malaysian PM has been the most vocal, warning Xi Jinping against “new colonialism” and suspending two BRI projects worth USD 23 billion. Most countries fear being lured into a debt trap with possible consequences in terms of their sovereignty. The failed Hambantota port exemplifies this risk: Sri Lanka was forced to hand over to China a 99-year lease on the port. In short: the evidence increasingly suggests that China has overextended itself with a flurry of investment projects that are likely to prove too expensive and unproductive. Beware a large bust to follow this initial boom.
- Italian political and financial risks loom large but are overblown by the market.The government’s plan to blow out the budget deficit will be constrained by the bond vigilantes. The risk of contagion to the rest of the EU is small,and the risk of an exit almost nil. Global foreign investment will become increasingly constrained by national security considerations. The corollary: companies, all over the world will be encouraged or forced to operate in the“national interest” – whatever this may mean. For a nearly-warning sign of this enduring trend, look no further than Firrma (the new Foreign Investment Risk Review Modernization Act that just passed through US Congress). The bill, that has bipartisan support, will make it increasingly difficult for foreign (aka Chinese) companies to invest in the US, and for US companies to invest abroad (aka in China). Similar attitudes and/or measure scan be observed in many other countries.
- Corporate concentration is increasing everywhere, but most particularly in the US where it is up 48%since 1996. Among US publicly listed companies, the gap between prices charged and production costs – a measure of corporate power – has gone up by 42% between 1980 and 2016, signalling weaker competition detrimental to the consumer. Could antitrust attitude scurb the market-distorting power of the superstar companies? Probably not in the US where regulatory capture is so entrenched. For global regulation on tech giants, look to the EU and China.
- The US stock market just set the record of the longest running bull market in history (it started in March 2009). The most significant news is that it is also shrinking: the US stock market is today half the size of its mid-1990s peak, and 25% smaller than it was in 1976.This could explain some recent trends like fewer initial public offerings,smaller companies being swallowed by the giants, and many companies remaining private for longer. In any case, this shrinkage is troubling for the economy, for innovation and for transparency.
- Last month, we mentioned that global warming is raising the cost of capital in those countries most affected by climate change.It’s also hitting their prospects for economic growth through ripple effects like lower productivity during periods of extreme heat. Any assessment of climate change for investment purposes can only be undertaken in the most granular possible manner, but from a top-down perspective, two things matter: (1) “supercharged” weather events will accelerate and start affecting ROI in the next 5 years, not 15 or 20 years from now; (2) some regions like southeast Asia, the Middle East, west Africa and the north China Plain will suffer disproportionately while others will benefit – in particular the 10 lowest-risk countries that happen to be largely in Europe.
- AI impact on employment remains an open and context-dependent issue, but in China some large manufacturers have reduced their workforce by 40% through automation. This is the proof that we should not underestimate the magnitude of the tech labour-substitution effect and its potential consequences on social stability.In Q3 2018, top “must-watch” issues include: (1) How the US-China trade war and the US administration aggressive negotiating stance (NAFTA,threat to leave to WTO) will evolve; (2) Keep an eye on the USD debt in EM(USD 3.7 trillion last March), (3) The vast array of geopolitical risks and how some currency plunges may cause collapse or turmoil (Venezuela, Iran); (4) BigTech’s growing political woes and the coming profit-pitching regulatory backlash; (5) Whether the conviction of Paul Mana fort and the guilty plea of by Michael Cohen affect Trump’s ability to govern and provoke political instability in the US . For real-time / in-depth analysis on any of these, please contact us.
