The Challenges of 2016


By Lord David Triesman, Group Director

It is sometimes said, unkindly, of economists that they are very good at predicting the past. Let me take the risk of thinking about the next year.

2016 has started with mounting uncertainty. Markets are volatile. A read-off of China’s economic prospects is hotly contested. Russia is subject to significant sanctions and they are likely to harden. It has responded with food import sanctions from which only New Zealand agriproducts appear exempt. Europe is faced with unresolved financial weaknesses, threats of terrorism, unmanageable refugee flows; and the threat of British exit from the EU seems certain to have a major impact on Europe’s and the UK’s economies. The immediate impact is seen in currency volatility but longer-term Brexit will have consequences for the economies and security of traditional allies (and some friends who were formerly enemies). Given the levels of conflict on Europe’s southern and eastern borders, any disturbance of strategic alliances is not helpful.

Taken together, these factors are not a basis for optimism. But we also need to think about deeper-lying economic issues.

Globally, many economists now predict entrenched stagnation. The IMF’s World Economic Outlook (October 2015) showed global growth at 3.1% in 2015, down from 5% each year from 2009-2014. Several other indices show similar decreases in performance. Of course, this did not lead to a passive response from central bankers.

The strongest developed economy – the USA – had the strongest momentum after 2008 although the IMF and the US Federal Reserve differ on its magnitude. The Eurozone growth has fluctuated between 0% and 1% since Q4 in 2013. Japan is in negative growth territory. Among the BRICs Brazil and Russia are in recession, almost certain to be joined soon by South Africa. Only India’s trajectory looks positive.

The Central Bankers’ response has been the expansion of fiscal and monetary policies to drive growth in their economies but inevitably this is a long-haul. And this is so because effective demand is inadequate. Some experts feel that it will need a new wave of technological innovation capable of boosting productivity and attracting new investment capital to change the overall economic trajectory.

China, the world’s largest trading economy, will itself have to deal with a persistent undertow from the rest of the world. The debt-driven crisis of 2008, its high spending and low savings, may well have created a ‘debt-supercycle’ with a further dangerous round occurring around Treasury bonds (particularly in the US) impacting on the economies of nations holding sizeable quantities of these bonds.

Inevitably a thumb-nail sketch is limited, inadequate. Yet it does serve to show greater imagination is needed to find unusual positions. The hunt for value investments, especially if asset backed, will continue in the developed world. But is a good time to turn the searchlight on special positions in the developing world. These are likely to be found where for one reason or another an economy has been excluded from normal economic conditions yet has the preconditions for advance – for example, a good education level and negligible corruption. In such cases almost everything is needed or needs to be renewed. These economies start from a hunger for all current technologies and are not dependent on technical innovation.

In our view, several years of work preparing for Cuba’s re-emergence into more normal trading conditions and the genuine imagination of its banking leadership, provide one of the real global opportunities if structured and advised with appropriate sensitivity.

Whilst there are often unrealistic predictions about when economies will take off or move decisively to another level, the signs are good. Rapprochement with the neighbours, careful advance avoiding some of the wilder changes of other regimes, and a desire to work with people with whom deep trust has been built over years are all benchmark signals of the likelihood of success.

China will continue to generate opportunities. Attempts to exclude China through the decisions of the Trans-Pacific Partnership, the Trade in Services Agreement, and the Transatlantic Trade and Investment Partnership are unlikely to succeed. As China strives for higher quality trade and investment it surely will protect its global trading position. Much of the assessment of these opportunities will of course depend on the strength of the US dollar.

But that is another story.

This article is part of our March 2016 Private Office Newsletter.

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