Interest rates coming down. Foreign investors concerns about China. Europe trilemma. Singaporean PM concerns about the middle class. Plunging fertility rates. Tech: enough is enough? Russia-Ukraine stalemate. Sudan: the normalisation of chaos. And the normalisation of risks.

  • INTEREST RATES COMING DOWN AS CONCERNS MOVE FROM INFLATION TO EMPLOYMENT. August started with a mini-market panic, followed by a solid recovery. Powell’s remark that “the time has come for policy to adjust” (i.e.: a cut in interest rates) gave it a strong boost. A September Fed cut of 25 basis points is a quasi-certainty, marking the end of a two-and-a-half year hiking cycle that began in March 2022. The ECB and the BoE will follow suit, firmly on a course to lower interest rates further in the coming months. The market’s irrepressible confidence is predicated upon the assumption that (1) rates will keep coming down, (2) global GDP will keep expanding, and (3) the US economy will keep experiencing a soft-landing. In short, that everything will go OK. A bold assumption.
  • CHINA. In Q2, foreign investors pulled $15bn out of China, an unmistakable sign of rising concerns and disenchantment. One exception though: German industries (most notably carmakers) doubling down in China with the total amount of German FDI at €7.3bn in H1 2024 compared with €6.5bn for the whole of 2023. Any escalation of geopolitical tensions between China and the EU would prove devastating for the German economy.
  • EUROPE’S TRILEMMA. Whether it’s France, where Macron seems unable to form a functioning government, Germany, with far-right populists about to win state elections, or the UK, where Starmer’s government faces a surge of negative views after barely a few weeks in power, all European countries are subject to a similar ill: their apparent ungovernability. To different degrees, all European countries, face the same conundrum, an inability to simultaneously: (1) preserve a decent welfare state; (2) keep to fiscal rules, and (3) increase defence spending.
  • THE SINGAPOREAN PM PINNED IT DOWN. PM Wong recently said: “We’ve seen what happens in other countries when the broad middle falls behind: the centre does not hold; and societies begin to fracture and collapse.” He then added: “Do not assume this cannot happen here. It can.” In the world’s fifth richest country (in terms of GDP per capita), policies destined to address concerns about rising costs of living, the hollowing out of the middle class and its political consequences are paramount.
  • PLUNGING FERTILITY RATES. In 1963, the world fertility rate averaged 5.3 children per woman. It now stands at 2.3, a downward trend driven by emerging markets, with rates falling from 6 to 2 in India, and from 7.5 to 1.5 in East Asia, below the 2.1 threshold at which a population declines. The fact that the whole world will be ageing, with the population of many countries declining, will become a key consideration for investors. The global implications of fewer people include: (1) reduced aggregate GDP growth, (2) stretched public finances as less working-age taxpayers will have to support more retired older people; (3) a shrinking pool of new employees, (4) increased demand for some sectors like healthcare and tech – automation.
  • TECH AND SOCIAL MEDIA: ENOUGH IS ENOUGH? The US Justice Department’s upcoming decision to possibly break up Google and preliminary charges against Pavel Durov in France (he’s accused of enabling organized criminals to carry out unlawful transactions on Telegram) look entirely dissimilar. Yet, both events crystallize mounting concerns with the unfettered power of tech and social media.Google is accused of illegally monopolizing the online search market, while the French authorities claim that, by failing to properly moderate its content, Telegram helped facilitate illegal activity that includes terrorism, money laundering, fraud, child exploitation and drug peddling. Abuse of market power and the perennial debate between online safety and free speech are now leading to a regulatory backlash and legal crackdown. This will clip the wings of profitability and could take some investors by surprise. Whether it’s Brazil blocking X (after Musk ignored court orders) or youth activists calling for regulation to end social media addiction (like at our forthcoming Summit of Minds), pay attention.
  • RUSSIA-UKRAINE STALEMATE. Despite Ukraine’s surprise incursion into Russia’s Kursk province, and Russia’s progress in the Donbas region, both Russia and Ukraine lack the military assets required to mount a major offensive against each other. As a result, they are headed towards a stalemate. The least bad outcome: a frozen conflict.
  • SUDAN: THE NORMALISATION OF CHAOS. The country is imploding, with more than 10m ‘refugees’ who have nowhere to go and a famine looming. The international community is either using the murderous civil war to compete for influence (Egypt, Russia, Iran, KSA, Qatar, UAE, Turkey) or proving impotent (UN and the AU – African Union) or disengaged (the ‘West’). Although currently barely deemed newsworthy, the conflict is likely to spread, destabilising bordering countries (most notably: Chad, Egypt, Ethiopia and Libya) and even regions (the Red Sea and the Suez Canal). It will also trigger a flow of refugees towards Europe. Sudan’s fate shows the price of a disintegrating international ‘order’. It could prove as disastrous as Libya in terms of global instability, but on a much larger scale.
  • NORMALISATION OF RISKS. In a similar fashion, with equities moving to record highs, the financial markets are normalising geopolitical turmoil, seemingly indifferent to Gaza and Ukraine despite the risks of escalation and miscalculation. With years of ubiquitous dark geopolitical clouds forming, they’ve become the norm – therefore part of the landscape and as such discounted by investors. At best, they’ll cause temporary tremors and disrupt supply chains. At worst, they’ll expand existing conflicts, provoke new ones and will dramatically increase uncertainty (and thus volatility). A reckoning is inevitable.
  • ON OUR RADAR THIS WEEK: France and Germany are the twin engines that propel the EU-27 countries-club forward. Yet, both face worryingly intensifying domestic issues. Macron seems unable to form a new government, while Scholtz is about to suffer a major electoral defeat. In both countries, the populist far-right is on the ascendency.
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