• Global economic data continues to weaken, with contractionary forces taking hold around the world. However, contraction doesn’t mean recession: growth is slowing but expansion isn’t dead yet! Whether the slowdown remains mild or not depends on three things: (1) the US-China trade war being contained; (2) China’s financial problems not intensifying; (3) US growth not decelerating much below 2%.
  • The most significant slowdown is taking place in China, whose economy seems to be much weaker than thought just a few months ago. The country is in the grip of a perilous downturn, having to deal simultaneously with its unsustainable credit-driven growth model and the consequences of the trade war with the US. China’s deceleration (credible sources put its growth rate at 3-4%, at best) is the single greatest threat to the global economy. As shown by Apple’s disappointing results, it will affect the earnings of all global companies, but prominent luxury brands are first in the line of fire.
  • From a broader and longer-term perspective, it is the context in which this economic slowdown is occurring that really matters. In the foreseeable future, what’s happening in economics will largely be determined by politics and geopolitics. Both are haunting decision-makers and clouding the economic outlook.
  • If just one word were to capture the mood in Davos, it would be gloom. Disenchantment and nervousness were pervasive at this year’s gathering. Animal spirits are down. Publicly, business executives worry about climate change and acute divisions in society. Privately, some fear the (inevitable) state response to the rising concentration of corporate power (with calls for a breakup in tech, pharma, media, etc.). These are all problems for which the current system does not offer any viable solution, meaning, as some participants suggested, that: “we are sleepwalking into a major crisis” and “drifting into global problems from which we will struggle to extricate ourselves”.
  • The business leaders and investors assembled in Davos know that the days of the incumbent form of capitalism are numbered. Most realise that they ignore the common good at their peril. What does this mean for investors? ESG strategies, set up to mitigate the colossal environmental and societal challenges that we collectively face, have a bright future. At the moment, they are beset by a dearth of high-quality metrics, but the problem of defective data will be progressively resolved. In the meantime, the ESG business will continue to boom. Investors representing 25% of global assets under management already integrate ESG strategies into their decisions. The direction of travel is clear.
  • Today’s major issues manifest that we live in a world of “ontological” uncertainty. Nobody can predict (let alone know!) how Brexit will unfold; whether the US-China trade war will escalate or not; if the Yellow Jackets movement will fade away; whether climate change will accelerate beyond our wildest fears… It is startling (but not infrequent) to hear decision-makers and experts directly involved in the issues confess: “I simply don’t know…” In such circumstances, it’s hardly surprising that investors lack firm convictions and that strong bouts of market volatility ensue.
  • The Brexit debacle could unfold in a myriad of ways, but hardly any insider believes that the March 29 deadline for departure won’t be extended. Irrespective of what happens next (PM May just succeeded in uniting the Conservative party with a deal she knows she cannot deliver), the damage to the UK economy is done. It is smaller today than it would have been with the status quo ex-ante, and will be smaller tomorrow because of the prolonged uncertainty that is deterring investment. Britain is realising the potency of the “omelette syndrome”: it’s easy to go from egg to omelette, but exceedingly complicated to do the opposite. Brexit is not a one-off to be done and dusted, but rather an on-going process that will drag down the UK economy and exhaust its politics for years to come.
  • As epitomized by the Huawei saga, the growing rivalry between China and the US (now enlarging to the West) is exerting a negative impact on many businesses’ bottom line, and will increasingly do so. To illustrate the point, Chinese direct investment in Europe and the US fell last year by a whopping 73% (Y-o-Y) while Chinese net purchase of US real estate decreased by 86% (compared to 2016). “Hostage diplomacy” will compound these problems. Political hostage-taking is an extension of trade wars and the clearest manifestation yet of the return of brute-force politics between states. The bottom line for most Western businesses: sales projections based on the “Chinese consumer story” will have to be significantly revised down.
  • In “Surveillance Capitalism”, Shoshana Zuboff makes the case that customers are being reinvented as data sources. This produces anti-democratic asymmetries of knowledge that in turn transform our economies and societies. Her argument will gain traction in 2019, exacerbating the tech backlash, and putting the issue of privacy firmly at the core of new laws, regulation, and collective action. The recent ruling of the French regulator against Google is the first salvo. Others will follow. Ultimately, the argument about surveillance begs the question of whether big tech risks becoming big brother. George Soros thinks so: he declared in Davos that the Chinese social credit system constitutes a “mortal threat” to open societies.
  • We see two reasons for cautious optimism that are rarely mentioned. The first is the scaremongering about sovereign debt. Yes: it is very elevated, but in most countries economic growth remains higher than interest rates, meaning that economies produce enough to cover interest payments. Debt, if invested wisely, can boost future economic growth. The second is to ask (provocatively) whether the world will soon reach “peak populism”. There is scattered evidence that populism is running into trouble (like in Hungary) or mellowing (like in Italy).
  • In Q1 2019, top “must-watch” issues include: (1) global trade tensions and the (receding) chance of an agreement between US and China struck by March 1, (2) macro news from China, (3) whether the Fed sharp dovish U-turn will endure, (4) the (increasing) risk of the UK sleepwalking towards a no-deal Brexit, (5) the vast array of political and geopolitical risks (most notably Venezuela).

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