Cash & Investment Management

Global Political Risk in 2017

Friday 10th February 2017

All through the last decade nationalism and nation pride have been on the rise, especially noticeable in America and Europe. Intolerance of non-citizens in the belief that present governments have subordinated their countries’ best interests for outsiders. This is all encompassing the urgent need for new leadership who are up to the challenges of a more nationalistic agenda, having some pride as a nation again, and whose view of their countries best interests seems to call for the upending of the collective efforts to build a defence system like NATO and an economic union like the EU. In late 2016 we saw far-right Austrian candidate Norbert Hofer lose by a smaller than expected margin, almost winning in a rerun of the election earlier in May in which Mr Van der Bellen won narrowly. Voters remain divided on the outcome. Norbert’s message is similar to that of Trump and in effect he is saying “Make Austria Great Again”, calling for closed borders in particular to Muslims, wants revised trade terms with the EU….sounds familiar?

Meanwhile the steadily eroding middle classes of the US and Europe are paving the way for changing consumer behaviour and trends and is resulting in the loss of more traditional skills involved in the handcrafting of individual luxury items insofar that luxury is not something made by a machine in a repetitive fashion. Ultimately, luxury needs a human element, to make it unique and different to pique curiosity. With the changing political landscape and the embracement of new technologies, the unemployment and marginalisation of the middle classes caused by expanded use of robots, artificial intelligence and the new machine age of automation, millions of jobs will be lost while social inequalities on which the luxury industry thrives, will be further reinforced.

The result is visible and has helped Trump to victory and is easy to see for yourself in the rising unemployment across the Western world, with years to a generation needed to reskill the workforce, while some people are just too old to want to reskill, and hence you have an upsurge in Trump voters across the middle classes who has not seen an improvement in their situation from one generation to the next. The same holds true for Brexit supporters and nationalistic tendencies surfacing all throughout Europe. Carpe diem: politicians to the right to far-right of the spectrum are capitalising on the discontent of the rising unemployment. Even with the January 2017 US monthly jobs report showing gains crushing the expectations, wage growth disappointed with hourly earnings rising just 0.1% over the prior month and 2.5% over last year. Economists were looking for 0.3% improvement over last month and a 2.8% jump over last year.

Risks from this ever increasing divide between the super-rich and the rest can lead to a political divide that will result in the hatred of the rich, bling not being in fashion anymore whilst luxury must become more discreet. This is both economic and political in nature.

Some of the more direct threats to the World in 2017 also incorporate the following factors:

Unpredictable America: is the US still the leader of the free World? This superpower was once the international trump card imposing order to force compromise and head off conflict. Now it is a wildcard. What will Trump’s stance be in Ukraine, where Russian separatists are bombing Ukrainian civilians and no-one is sure of the Trump administration’s view on this and many other world affairs. U.S. domestic policy poses fewer risks than their foreign policy, because the Republican-controlled Congress has greater power to impose predictability on an unpredictable new president.

China Overreacting: The 19th National Congress of the Communist Party of China will be held in Beijing, China in the autumn of 2017. The need to maintain control of the transition ahead of the Party Congress in the autumn will increase the risk of economic policy mistakes that rattle foreign investors and international markets. Included herewith comes North Korea, Taiwan, Hong Kong, the East and South China Seas – which makes for an interesting 2017 for China.

A Power Vacuum in Europe: Angela Merkel has been the steward of Europe through tough times in recent years. Europe is to face more challenges in 2017 from France’s elections, Greece’s finances, Brexit negotiations, and delicate relations with both Russia and Turkey, all weakening Merkel’s ability to lead strongly.

A Pause in Economic Progress: Don’t expect big progressive steps in the much needed economic reforms required in 2017. Leaders of countries like India’s Modi, Mexico’s Pena Nieto, have accomplished their full potential for the time being. In the European continent France and Germany reform will be halted until after the coming elections and China is also facing a major leadership transition and Turkey’s Erdogan is all-consumed by domestic issues, and so is Britain’s May and South Africa’s Zuma. Don’t expect a flare-up in India vs. Pakistan at a time when both governments need stability, and India taking a restrained stance on provocations by Pakistan.

Technology Disrupting the Middle East Governments in the Middle East is fighting a losing battle to retain their traditional legitimacy and furthermore are subjected to intense scrutiny from their own people and groups within their own people which is enabled by technological change and improved communications technology which enhance the ability of angry citizens to find like minds and to organize, and is aiding in the instability of an already fragmenting region. The risks are both top-down and bottom-up. The revolution in energy production undermines the stability to states still deeply dependent on oil and gas exports for state revenue. Automation of the workplace will make it even harder to create jobs for growing numbers of young people. Cyber conflict is further shifting the region’s precarious balance of power.  Forced transparency i.e. Wikileaks etc. is especially dangerous for brittle authoritarian regimes.

Politics Interfering with Central Banks Western central banks are ever more susceptible to the same sort of crude political pressures that distort economies of the developing nations. In 2017, there is a real risk that Trump will use the Fed as a political scapegoat, putting renewed pressure on future Fed decisions. He might also eventually use Janet Yellen’s departure (her term is due to end in February 2018) to replace her with a personal ally, undermining the Fed’s credibility for years to come and in the UK Britain’s Theresa May has blamed the Bank of England for low rate policies that have increased income inequality. In Germany, Wolfgang Schäuble has argued that low interest rates have reduced the incentive for peripheral European states to accept the need for reform.

The White House vs Silicon Valley President Trump and the tech sector are juxtaposed Trump wants security and control whilst many tech firms rely on freedom and privacy for their customers, and employs a transient labour force promoting automation and streamlining into overdrive while Trump wants job creation. The two sides differ substantially on investment in science and clean energy. In 2017, there is a lot of potential conflict between Trump’s agenda ideas and the giants of Silicon Valley to pick a fight.

Turkey’s Ongoing Crackdown  Recep Tayyip Erdogan continues to abuse the ongoing state of emergency to seize control of day-to-day affairs and tighten his hold on the judiciary, bureaucracy, media, and even business sector through waves of arrests and purges. It is assumed that in 2017 he will most likely call out a referendum to formalize his powers and solidify his stranglehold on the country making it harder for ordinary Turks to escape their economic problems and Turkey’s worsening relations with Europe and its neighbours. It’s a volatile player in an increasingly volatile region. Let us see if Turkey joins the EU, and if there will be ever closer Union amongst European nations as Brussels wants to see it, after all the western part of Turkey falls in the European continent.

North Korea Rattling Its Saber  North Korea is adamantly carrying on developing their missile capability that poses a clear and immediate danger to the United States and it appears the DPRK is approaching the finish line. Kim Jong Un said in his New Year’s message that preparations for launching an intercontinental ballistic missile (ICBM) had “reached the final stage” although that claim has not been independently confirmed. This comes at a time of dangerously deteriorating relations between China and the United States being the two countries that will have to work together to manage North Korea’s ambitions.

A Struggling South Africa and Brazil President Jacob Zuma, beset by corruption allegations, is afraid to pass power to someone he doesn’t trust. Zuma’s hidden agenda is not so hidden anymore and the resulting infighting over succession stalls any momentum toward crucial economic reform in the country and limits South Africa’s ability to offer leadership in Africa, the region and to assist in peacekeeping and mitigating conflicts inside neighbouring countries. Brazil will have an easier 2017 as legislators try to appease public anger for change by making progress on President Michel Temer’s agenda. Brazil(South America’s largest economy) is betting on renewed tourist interest to boost its economy in 2017 and capitalising on the 2016 Olympics held there with the ministry of tourism expecting a 6% increase on the previous year’s visitor numbers, and with the Rio Carnival(Feb 24th to 28th) coming up they seem on track for another good year. Brazil will have an easier 2017 as legislators try to appease public anger for change by making progress on President Temer’s agenda.

The global rebalancing of power that involves but are not limited to China, the USA and Russia, and the last two becoming much friendlier, could potentially create volatility and change in the rest of the world, that it could potentially become disruptive and create risks elsewhere that were not anticipated.