The global economy is doing better (for the moment), but inflation remains sticky. The ever-lasting war that Putin cannot win but won’t give up, risks major escalation if China gets involved. A world of three non-cooperative blocs is becoming the geopolitical reality. The market vagaries of fighting climate change. Tech innovation moving faster than we can cope with. In China, politics always trumps economics. 

  • THE GLOBAL ECONOMY: BETTER BUT NOT OUT OF THE WOODS YET – The global economy remains in a better place than it was just a few months ago. That said, the outlook is still murky. Even though most coincident indicators look good, some leading indicators paint a different picture. Two worrisome signals: (1) global companies reporting a decline (or expressing concerns) about their order books; (2) thedepletion of consumer savings, particularly in countries with low saving rates (like the US).
  • STICKY INFLATION – Elevated headline inflation proves that inflationary pressures are more persistent than the markets and pundits expected just a few weeks ago. In the US, the PCE price index (the Fed’s preferred inflation gauge) unexpectedly rose to 5.4% in January (Y-o-Y), after several months of decline. In Europe, inflation still stands at 8.6% (Eurozone average, end-January, Y-oY), probably easing to 8.1% in Feb but with core inflation proving stubborn. As a result, the Fed will be forced to tighten its forecast beyond the 5.1% it anticipated last year (possibly up to 6% in H2 of this year), while the ECB will raise by another 50 basis points in March. Looking beyond inflation and higher-for-longer interest rates, the US upcoming partisan warfare over the debt limit should be on our radars. It has the potential to disrupt the global economy and financial markets.
  • THE EVER-LASTING WAR – One murderous year on, Russia’s war is at a stalemate – with no end in sight. Today, the Russian army controls less than 20% of Ukraine’s sovereign territory, with the current offensive failing to make ground. Putin cannot win but won’t give up, despite the huge costs the conflict and the sanctions are imposing on Russia (200,000 troops killed and wounded, 800,000 emigrants depriving the economy of talented human capital, and a slowly deteriorating war economy). Putin’s messianic quest against “the West” and conviction that time is on his side are the fundamental drivers of the conflict. His belief that he can win a war of attrition and outlast the West’s determination to support Ukraine mean that the war won’t end in the foreseeable future. As the US (NATO) will do its utmost to avoid an out-and-out war with Russia, a plausible outcome is a cease-fire similar to the one that has been in place between North and South Korea for the last 70 years.
  • (POSSIBLE) MAJOR ESCALATION – If the information that China intends to provide Russia with military support proves to be true, it would amount to a major escalation. US official sources and German media outlets assert that China is about to provide Russia with ‘lethal aid’ (which China denies). If it were to come to that, this would equate to an outright proxy war between China and the West, the establishment of a new axis and a subsequent economic, trade, and possibly even capital decoupling. There are several possible scenarios in varying shades of grey, ranging from total to partial decoupling. No matter what happens, Western companies doing business with China and Chinese companies doing business with the West must prepare for the potentially devastating consequences of a sustained unstable relationship between China and the West.
  • THREE BLOCS – At the risk of being simplistic, it looks like the geopolitical landscape might morph into three broad blocs: the West, the Eastan opportunistic alliance between Russia, Iran, and China – the only country that can effectively challenge US supremacy, and the ‘Global South’ – an amorphous group whose perspectives diverge from those of the West and who refuse to take sides (like India and South Africa). Such a multipolar polar world centred around spheres of influence does not equate to a world ready to embrace multilateralism (a system of regulated co-operation among countries). Quite the opposite. In such a disorderly world, the stability that investors need to be confident would remain elusive, at best.
  • THE MARKET VAGARIES OF FIGHTING CLIMATE CHANGE – Vanguard’s (the world’s second largest asset manager) recent decision to pull out of the “Net Zero Asset Managers Initiative” – a coalition of around 300 asset managers committed to reducing greenhouse gas emissions – indicates how politicised, particularly in the US, ESG has become. But despite this and the pervasiveness of greenwashing, the ESG trend remains inescapable and incontrovertible. Analysts and academics furiously disagree about whether ESG strategies outperform broad based investing, but fund flows to sustainability are more resilient than the rest of the global fund market. As a good example: 694 new ESG funds were launched last year, focusing on both “transition” and “solution” companies (respectively those that are decarbonizing the fastest and those that are already green, like wind providers).
  • EXPONENTIAL TECH INNOVATION – Here’s a rule of thumb for what’s going on in tech: everything will happen many years earlier than expected. For example, just last Summer, Microsoft engineers were anticipating that ChatGPT would arrive in 2033! Digitization, AI, and synthetic biology fusing with each other suggests that progress in domains as diverse as personalized medicine, solar cells, regenerative agriculture and 4D manufacturing will follow a fixed doubling time, meaning ever greater progress as time goes by. Agile businesses that can deploy capital fast will benefit considerably, but keep in mind that new technologies bring out the best and the worst in people. Lawmakers and regulators will do their best, but like, for us all, keeping up with pace is tough. Global businesses and investors should plan for massive regulatory fragmentation.
  • THE MISSING CHINESE BANKER: WHAT IT SAYS ABOUT DOING BUSINESS IN CHINA – Bao Fan’s disappearance for a week followed by the subsequent message from China Renaissance (the bank he leads) that he’s “co-operating in an investigation with some Chinese authorities” is the proof that the Chinese heavy hand of the state supersedes every other consideration. Whatever the reason may be – official animosity towards wealthy Chinese transferring their assets to Singapore or something else – this won’t do much to inspire business confidence. In China more than anywhere else, politics trumps economics.
  • For an in-depth proprietary analysis of any of the bullet points and what they mean for you – please contact us. We provide tailor-made, independent research, with insights and actionable ideas based on a rich and diverse network. Details HERE.