• The global economy continues to head downwards while the financial markets are enjoying a spectacular recovery. This disconnect is best explained by the situation in the most advanced economies (below-trend growth at 0.8%) and worries about China. Perversely, bad news in the real economy is good news for the markets because it reduces the likelihood of further interest rate increases. The take-away for investors: central bankers seem unable to normalize policy without causing mayhem. This, in turn, suggests the possibility of “infinite QE”– with all the contingent distortions: it fuels inequality and can even reduce economic activity, rather than boost it.
  • Stocks took comfort in Trump’s decision to delay the March 1 deadline on raising tariffs on US $200bn worth of Chinese goods. This corroborates a pattern that has emerged over the past months: financial markets rejoice every time they see the sign of a thaw in the US-China trade tensions. However, this misses the point. Trade is only a subset of the real issue: the battle for tech dominance that opposes the US and China, the enduring power and impact of which the markets underestimate. In the coming years, the fallout from this clash for tech supremacy of the two giants will define much of the world’s economic and geopolitical landscape, hitting (or favouring) companies’ valuations in the process. What businesses risk getting caught in the crossfire? First and foremost, US tech companies exposed to China (and vice versa of course), but also global companies with integrated supply chains.
  • The world is sleepwalking into a whirlwind of risks at the nexus of accelerating global warming / extreme weather events and growing geopolitical turmoil. This is the determining global trend of the next decades that will amplify risks across the entire economic and political spectrum.
  • The above means that the impact on valuations could be severe and sudden for those holding stocks or debt in companies whose products cease to be required when renewable alternatives become an imperative or simply more widespread. Many investors see global warming as a new trend or a cycle (following the “Little ice age” that extended from 1300 to 1850). This smacks of complacency and a false sense of its pace and manageability. The onslaught of climate change is avalanche in nature – occurring so fast and with such force that you don’t want to be in its way. As a consequence, opportunities for those invested in any technology, product or service that can mitigate (or adapt to) climate change abound. Conversely, risks for those victims of climate nonchalance will only grow.
  • The shrinking middle class is another fundamental trend in terms of economic and political outlook. For the first time in generations (in the Western world), an increasing number of people risk slipping down the socio-economic ladder rather than moving up it.  Occurring in a context of economic expansion, this causes frustration, angst, resentment and retrenchment. For example in the US: at the end of last year, employee pay and benefits as a percentage of GDP stood at 52.7% compared to 59% in 1970 and 57% in 2001. While business profits are on the rise, the labour share continues to fall. Technological disruption will exacerbate this trend.
  • The above point combined with a host of other reasons like demographics explain the current pushback against liberalism. In the two countries that embraced market liberalism with the greatest fervour – the US and the UK – socialism is back in favour, so much so that a majority of millennials (51%) now have a positive view of socialism and a more negative one of capitalism (in the US, only 45% view it positively, down from 68% in 2010). A storm of regulations and much higher taxes for the wealthiest individuals will eventually come because even radical proposals like Ocasio-Cortez plan for a 70% tax rate on incomes over $10m do well in the polls, including among an increasing number of Republicans (54% favour raising taxes on those earning more than 10m).
  • For the second winter in a row, the success of a basic coat has gone viral. The Oralay jacket produced in China that sells (mainly) on Amazon for about $130 competes with much higher priced premium brands like Canada Goose and Moncler. So what? (1) It reveals the growing disruptive power of the Amazon platform: it now allows sellers worldwide to store products in its warehouses, enabling them to get market share fast and thus to threaten the incumbents; (2) It may become fashionable to spend less. The “Amazon coat tale” could well be the canary in the mine for the luxury industry: in a world beset by growing environmental and societal problems consuming less conspicuously and less expensive things may become le must.
  • Brexit – Unless (unlikely) the pro-Brexit ERG parliamentary group dramatically changes its position and agree to support May’s deal, the March 29 deadline will be extended because nobody (be it the UK government and Parliament, the EU, or the business community) can conceive a nose dive off the no-deal Brexit cliff. What happens next? Possibly the organisation of a second referendum. But what Brexit really means and its real implications remain unknown, and as such the pain inflicted by confusion and indecision on the UK economy and polity will endure.
  • The global and multi-faceted scandal engulfing the Roman Catholic Church is occurring in the wake of the #MeToo phenomenon (which, in the US alone, has brought down more than 200 powerful men since Oct. 2017), and is part of the much broader picture of male-dominated organisations now falling foul of their own shortcomings. But gradually, women are gaining more power in public and private organisations. What does this mean for business? Sooner than most men realize, investors will penalize companies that are not moving fast enough in terms of gender parity and placing more women in top leadership positions.
  • Over the next few weeks and months, top “must-watch” issues include: (1) global trade tensions and whether an agreement between the US and China (if it is reached) is genuine, (2) macro news from China, (3) the vast array of political and geopolitical risks (most notably rising tensions between India and Pakistan, and the risk of escalation, miscalculation). For real-time / in-depth analysis on any of our bullet points, please contact us.