Inside Track – December 2019

  • To give you a sense of which global issues will shape the months to come, here are the buzzwords that appeared most frequently in our Inside Tracks of 2019 (in no particular order), with their corresponding macro themes for 2020: (1) the trade war and the strategic competition / growing rivalry between the US and China; (2) negative yields and the effectiveness (or not) of monetary policy(helicopter-money is coming); (3) the climate emergency and the race to net zero carbon emissions and increased risk of stranded assets combined with mounting environmental activism; (4) social unrest and the quest for policy solutions (including greater taxation); (5) a global system under strain and the continuing unraveling of the ‘old’ global order, (6) the surveillance economy and the regulation of big tech.
  • The announced ‘phase one’ trade deal between the US and China played no small part in driving US market indices to a new set of records, making 2019 one of the best years since the financial crisis erupted in 2008. Yet, in reality this is a small deal coming at a high cost. Existing tariffs on more than $360bn of Chinese products remain in place – the equivalent of a tax of “doing business” for all US companies that import components or finished goods from China. In addition, the deal neither compensates for nor removes the heightened uncertainty generated by the 19-month trade war – it has been and continues to be a potent brake on investment. The euphoria is misplaced.
  • It is easy to mock the French for their propensity to strike, but the quasi-paralysis of public transportation provoked by the new retirement law represents a warning shot for the rest of the world. Populations are ageing almost everywhere, but no country has yet put into place a pension system capable of supporting the fast-growing number of retirees. The drastic changes that are required will be resisted, so expect more global unrest in 2020, impacting GDP via pain inflicted primarily on the hospitality and retail industries.
  • This general propensity for unrest will be exacerbated by technology, which, in the years to come, will provoke “less social mobility, greater political unrest and greater income inequality” (to quote the director of the Task Force on the Work of the Future at MIT). White collar and lower-jobs alike will be negatively affected by the rise of automation and AI; and the stark truth is this: only in many years from now (if not decades) will they start benefiting from tech and innovation. All the fanciful projections of AI doubling growth over the next few years emanate from companies that have a vested interest in promoting unfounded claims (tech companies and consultancies).
  • Although low interest rates seemingly make it more palatable, the sharp rise in debt levels in emerging markets (EM) is a cause for concern. From 2010 to 2018 their debt to GDP ratio has increased by more than half (to 168%) – the largest and fastest increase in recent history. Although China is responsible for the bulk of it, it is broad-based (distributed across both the public and private sector) and concerns every region of the world. EM as a whole are more vulnerable today than they were at the onset of the previous crisis in 2007: 75% of them have budget deficits, their current account deficits are four times

larger and their dollar-denominated corporate debt is higher. In such circumstances, any rise in risk premium would unleash a major EM financial crisis.

  • As human beings, we tend to focus on what goes wrong rather than the opposite: losses loom larger than gains. To tame this bias of ‘loss aversion’, let’s enumerate the good macro news of 2019. (1) In low-income countries, growth per capita amounted to 2.7%, meaning that millions escaped poverty– particularly in countries where output grew the fastest (Bangladesh, Ethiopia, India); (2) Despite the horrific headlines in Afghanistan, Syria and Yemen, violent conflicts and wars are declining globally; (3) The fight against diseases such as Aids, Ebola, malaria and tuberculosis continues to progress (albeit slowly); so too efforts against illiteracy and for education of girls.
  • This said, there exist single events susceptible to going wrong with the potential to create global waves in 2020. Some candidates: (1) China experiencing its “Minsky moment” – proving unable to curb financial excess for fear of constraining economic growth; (2) The US election deepening political tribalism; (3) The UK departing from the EU single market without any trade deal (a hard Brexit); (4) The whipping up of Hindu nationalism in India leading to national fracturing and a sharp reduction in growth expectations; (5) The total demise of the WTO dispute mechanism ending up in the weaponization of trade via tariffs; (6) The ‘post-US’ Middle East and the Korean peninsula as on-going flash points and sources of instability.
  • With hindsight, 2019 will be regarded as a tipping point for the digital revolution. The earlier promises of freedom, convenience, civic engagement and community building have given way to grave concerns and angst about privacy loss, surveillance, distrust, dislocation, manipulation and endless outrage. From an investment perspective, this suggests that both ESG strategies and employee activism will increasingly focus on the reform of Big Tech.
  • E-commerce continues to rise relentlessly and globally. In the US, it just grew 13.6% year-on-year. Sales online benefit the fulfillment industry at large: everything that has to do with storing, packing and shipping online orders – ranging from warehouses and planes to package handling technologies and sorting facilities. In macro terms, the environment is the major casualty; from an industry perspective it is high-street retail and malls. However, the demise of the latter is not a fatality. Experiential retail, which e-commerce cannot deliver, represents a lifeline for many physical stores.One such example is the successful re-opening of Toys‘R’Us across the US, with theatres, spaces for events, interactive tree-houses and areas where children can play with toys while parents shop.
  • 2019 has seen major progress in the science of “inflammaging”: the chronic inflammation that develops with age and contributes to many diseases, ranging from arthritis, cancer and diabetes to depression and Alzheimer’s. The measures required to minimize inflammation and even reverse its progression are now well understood. They are beguilingly simple – boiling down to: (1) physical exercise; (2) quality of food (the less processed the better); (3) quality of sleep; and (4) reduction of stress. This is highly supportive for large segments of the wellness industry and well-being policies at-large.

Download the full report: December’s Inside Track