Lower global growth, higher interest rates and borrowing costs, Putin’s failing war efforts raise the stakes, far-right ascendency in Europe, markets disciplining the UK, natural capital is now a big deal, one reason for optimism: the Green Revolution, a take-away from the MB Summit of Minds in Chamonix. 

  • LOWER GLOBAL GROWTH – Expectations for global growth are being dampened down. The OECD now anticipates global GDP to be +3% in 2022 and +2.2% in 2023 (versus 4.5% and 3.2% 9 months ago). Inflation will ease but will remain elevated, at levels well above the central banks’ target almost everywhere in the world in 2023 and possibly beyond. Against such a backdrop, commodity prices and companies’ earnings are receding. Only the USD is rising, as it does during downturns and periods of geopolitical turmoil. Persistent dollar strength is good for (most of) the US economy, but by imposing contractionary pressure on the world economy, it makes life much more difficult for everyone else.
  • HIGHER INTEREST RATES AND BORROWING COSTS – Inevitable further increases in interest rates from the world’s major central banks are pushing up borrowing costs, which in turn increases the risk of defaults and of a severe recession. The situation is particularly perilous in emerging and developing countries locked out of international debt markets. The 55 poorest countries face debt repayments amounting to USD61bn this year and next and USD70bn in 2024 (for a total of USD436bn by 2028). Countries as different as Pakistan, Argentina, Ghana, Tunisia, or Egypt have no choice but to turn to the IMF.
  • PUTIN’S FAILING WAR EFFORTS RAISE THE STAKES – Putin’s offensive in Ukraine is floundering and events are not going his way. This explains his recent decision to (1) mobilise 300,000 reservists (so far, a disaster in the making: almost 200,000 young men have fled Russia to neighbouring countries), (2) annex four occupied regions of Ukraine (3) engage in nuclear blackmail. None of this will deliver victory, but it all heightens the risk of an escalation with NATO. Putin has no other option than to keep going and continues to display a readiness to run the risk of escalation. The recent sabotage of the Nord Stream gas pipeline is proof of this.
  • FAR-RIGHT ASCENDENCY IN EUROPE – In the past month, the far-right became Sweden’s second largest political party and won the Italian parliamentary elections – corroborating a European pattern of ascendency. Yet, to talk about the advent of fascism and a surge of extremism in Europe is misleading. There are at least five reasons why, and Italy is a case study. (1) Far-right political leaders always end-up putting some water in their wine (like on the € and quitting the EU), (2) Europe enjoys strong institutions (like two parliamentary chambers and constitutional courts), (3)There are effective counter-powers (like opposition parties and the media) and a dispersion of power across different centres, (4) EU institutions act as an effective and positive ‘straightjacket’, preventing policies straying too far from acceptable norms, (5) Bond vigilantes can also play a corrective role. All this is not to say that Italy’s sovereign debt to GDP running at 150% doesn’t remain a major worry, but rather to point out that EU risks are often overstated.
  • MARKETS DISCIPLINING THE UK – The markets have concluded that the fiscal policy just enacted by the new British government is senseless. The combination (normally found in emerging markets) of sharply rising bond yields and a sharply depreciating currency has condemned PM Truss’ ‘growth plan’ from the outset. The volatile mix of a real risk of financial implosion (now averted by BoE’s intervention), fiscal and monetary policies heading in opposite directions, and the government’s declaration of class war doesn’t augur well for the UK.
  • NATURAL CAPITAL IS NOW A BIG DEAL – Climate emergency is in the limelight, natural capital less so but equally important. They are the two sides of the same environmental coin. Hence, biodiversity, the most visible component of natural capital, is fast becoming the ‘next big investment theme’, with a market forecasted to grow from $4bn in 2019 to $93bn in 2030 (Paulson Institute). At a time when a rising number of banks, global companies, institutional and private investors recognise that biodiversity poses “a hugely material and systemic risk for investors”, Moody’s estimates that 9 industries (including coal, and oil and gas) with $1.9tr in rated debt have high or very high exposure to natural capital. Measurement and reporting pose considerable problems, but as for climate, there is no other option than to make progress and to do so very fast. Watch for the way in which the Taskforce on Nature-Related Financial Disclosures will roll out its framework and to get a sense of the exponential growth of start-ups offering nature-based solutions check out the MB good4nature.
  • ONE REASON FOR OPTIMISM: THE GREEN REVOLUTION – It will happen must faster than we think! New research proves that the cliché that decarbonising the global energy system will be expensive is plain wrong: almost all existing models overestimate the costs and underestimate the deployment rates and the pace of innovation. In fact, over the past 10 years, green technology costs have fallen significantly and will continue to do so. Hence, achieving a net zero carbon global energy system by 2050, and possibly before, is not only possible but profitable as well.
  • A TAKE-AWAY FROM THE MB SUMMIT OF MINDS IN CHAMONIX – With the US unipolar moment gone, two trends are making the new world disorder particularly complex, fragmented and fluid. (1) The ‘global south’ is becoming increasingly angry with the West and is in no mood to be lectured about ‘Western values.’ This explains why countries like India, Brazil and South Africa refused to join the US and EU in isolating Russia. (2) While democracies face their own set of challenges, troubles in autocracies are also on the up, with strongmen coming under pressure from their own populations (demonstrations in Iran, online protests in China, exodus of young men in Russia). The pervasiveness of social media makes controlling such movements difficult. And this will only get harder: Internet access (65% of the world population today) will likely rise to 100% by 2030. The lesson for investors: beware opportunistic alliances, overlapping boundaries, and regional and plurilateral pacts – such a world will be more inflationary.
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