2017 Outlook: Active Investing Amid Reactive Geopolitics

Neil Dwane | 01/09/2017
China flag

Summary

Despite major US market indices near record highs, the beginning of 2017 is no time for investor complacency. In a year that could have more surprises than 2016, Neil Dwane says active investing is a strategic imperative amid shifting geopolitical trends.

Focus Shifts to Fiscal Policy and Populism

After a tumultuous year, investors should keep watch on the rise of populist politics, China’s re-emergence as a global growth engine and a renewed focus on government spending as interest rates remain low.

Populist politics will drive market volatility. Europe faces a year of Brexit-fueled uncertainty while we expect the US to turn inward as China and Russia become more assertive.

Lower-for-longer rates will linger. Financial repression remains in effect as the world seeks new ways to delever from massive amounts of debt.

Hopes will turn from monetary to fiscal policy. Negative interest rate policies and quantitative easing will evolve as countries shift attention from monetary to fiscal policy.

5 Investment Themes for 2017

Global economic growth

Low, slow and dull

  • Muted grow in developed economies
  • Emerging markets look to prosper

Central banks

Low rates for longer

  • Fed expected to tighten further
  • ECB and BOJ maintain loose monetary policy

China

Drives growth in Asia and beyond

  • Committed to expanding trade
  • Engine of growth for global economy

Oil

Demand and supply in balance

  • Slightly rising oil prices will boost oil investment
  • Prices will not rise high enough to reignite US shale boom

Geopolitics

A change in trends is underway

  • Nationalism and populism are on the rise
  • Trump takes office amid key European elections

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Neil Dwane

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Global Strategist
London
Neil Dwane is a portfolio manager and the Global Strategist with Allianz Global Investors, which he joined in 2001. He coordinates and chairs the Global Policy Committee, which formulates the firm’s house view, leads the firm’s bi-annual Investment Forums and communicates the firm’s investment outlook through articles and press appearances. Neil is a member of AllianzGI’s Equity Investment Management Group. He previously worked at JP Morgan Investment Management as a UK and European specialist portfolio manager; at Fleming Investment Management; and at Kleinwort Benson Investment Management as an analyst and a fund manager. He has a B.A. in classics from Durham University and is a member of the Institute of Chartered Accountants.

Will Donald Trumpism Bury Davos Elitism?

Neil Dwane | 01/17/2017
Davos

Summary

Neil Dwane says the rumbling heard by politicians and power-brokers at the World Economic Forum in Davos comes from a new political avalanche of populism—one that threatens to sweep away pro-globalization sentiment and change the investment landscape.

Key takeaways

  • Populism and protectionism seem to be growing stronger around the world; consider Brexit, Trump's victory and Italy's "no" vote
  • The pro-globalization mindset is being challenged by its previous champions, and not by outside forces like radical Islam or communism
  • Investors should expect local and national politics to promote economic self-interest and slow global growth, while governments and corporations will want to be viewed as more responsible partners

Political avalanche of populism

To the great discomfort of many members of the global establishment, Donald Trump is already much more than the President-elect of the United States. He also sits atop a global political avalanche that began gaining speed in 2016—through the pro-Brexit vote in the UK, the Republican sweep of the US elections and the resounding "no" heard in Italy's referendum.

Perhaps the Davos elites will begin turning their eyes to the Milwaukees and Middlesbroughs

The rumblings of this new political force are sure to be felt this month in the beautiful chalets of Davos, the Swiss resort town that has become an annual place of pilgrimage for the most ardent champions of globalization and free trade. For decades, almost every G20 government and Fortune 500 company has sent a delegate to the World Economic Forum in Switzerland, where attendees rubbed shoulders with global power-brokers, celebrities and politicians—not to mention powerful celebrity politicians like Bill and Hillary Clinton.

But today, given the populism and protectionism that seems to be growing stronger with each passing election, perhaps the Davos elites will begin turning their eyes to the Milwaukees and Middlesbroughs of the world–the places where anti-globalization feelings are among the strongest.

People vs. politicians

In this mindset, many democratically elected governments have begun to decay precisely because they have been busy protecting their own self-interested goals—not the people they were charged to lead. So in a string of now-historic elections, those who felt overlooked and underestimated gave the boot to pro-Europe elites in the UK, opened the door to a defiantly non-establishment Trump in the US and began setting their sights on more victories to come.

As we discussed at length at our September 2016 Investment Forum, it is important for investors not to view these recent political events—not to mention the many other important elections on the horizon in France, Germany and the Netherlands—as isolated and unconnected. Rather, they are part of a continuum with deep roots.

Recent political events are not isolated and unconnected, but part of a continuum with deep roots

In economic terms, one of the reasons the previously dominant forces of globalization and free trade are waning is that they have created a growing middle class in emerging markets at the expense of their counterparts in developed markets. In geopolitical terms, as the West failed to solve the challenges of Iraq and Afghanistan, the US has been toying with isolationism–which Trump campaigned upon–just as China and Russia have reasserted themselves on the global stage. All the while, South Korea and Japan's populations continue to age rapidly, and rising populism in Europe is exacerbating that region’s existential challenges.

Narrative collapse for the elites

As the political ground shifts, the old guard is being viewed through a much different lens. The previous narrative of the pro-globalization set was that democracy and free markets would prevail, with American exceptionalism as the benchmark against which all others would be measured. That narrative is now being debunked by its own erstwhile champions, particularly Trump's supporters, and not by outside forces like radical Islam or communism. It is becoming clear that the multinational companies who are globalization's ultimate beneficiaries are, like the Davos elites, facing unstable terrain ahead. Profit maximization, free trade and conspicuous consumption by the few are no longer viewed as de rigueur, but are actually perceived as the problem.

The efficient allocation of capital will likely fall and further impede global economic growth

Perhaps someday, the history books will need to make room for the era of globalization next to the Cold War, which also had an easy narrative of Western capitalism beating Eastern communism: By making the right choice, everyone could benefit, both personally and economically. However, as Lee Kuan Yew notes in From Third World to First, Asia was never likely to follow the Western path to democracy—not with its inherent contradictions and unaffordabilities.

Consequently, we as investors should begin to expect local and national politics to impede global supply chains and promote economic self-interest. The efficient allocation of capital will fall, which will be a drag on already-constrained levels of global growth. Yet at the same time, the new political trend will place new demands on the institutions that must deploy this much-needed capital, and there will be a growing call for governments and corporations to be seen as good partners. The practices of tax arbitrage, offshoring and profit maximization for shareholder value may soon be buried–if not wiped out completely. What is left when this storm passes will largely rest in the hands of the people who find themselves newly empowered.


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Expert-Image

Neil Dwane

linkedIn
Global Strategist
London
Neil Dwane is a portfolio manager and the Global Strategist with Allianz Global Investors, which he joined in 2001. He coordinates and chairs the Global Policy Committee, which formulates the firm’s house view, leads the firm’s bi-annual Investment Forums and communicates the firm’s investment outlook through articles and press appearances. Neil is a member of AllianzGI’s Equity Investment Management Group. He previously worked at JP Morgan Investment Management as a UK and European specialist portfolio manager; at Fleming Investment Management; and at Kleinwort Benson Investment Management as an analyst and a fund manager. He has a B.A. in classics from Durham University and is a member of the Institute of Chartered Accountants.
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