This year, our Global Strategist Neil Dwane carefully curated a holiday reading list that centers around China, geopolitics and disruption—three powerful forces that could reshape the world as we know it in 2017 and for generations to come.
Before you begin putting your feet up to enjoy the holiday festivities, you may want to grab a few titles from my new reading list, which gathers interesting perspectives on key political, economic and investment themes. China's re-emergence and rebalancing challenges will be a significant force in 2017; so will shifting political and geopolitical narratives, and the transformative power of disruption and technological innovation. I hope you find something on this list that will entertain, enlighten and provoke your "grey matter" while you enjoy time with your families! Best wishes for 2017.
Red Capitalism: The Fragile Financial Foundation of China's Extraordinary Rise
By Carl Walter
This book is a refresher on how important big banks are to China's economic policy—and why Beijing's recent intervention in the "shadow banking" world is part of a plan to meaningfully refocus these unregulated activities back into its economy. The larger goal for China over the next decade is to "rebalance"—moving away from exports toward consumption and services—as it becomes a global player in finance, trade and geopolitics. Will it work, and will China really surpass the US as the world's premier global economy?
The China Price: The True Cost of Chinese Competitive Advantage
By Alexandra Harney
China's "factory economy" frequently beats the competition by short-changing its workers and the environment, but China's new leaders seem intent on redressing some of the consequences of the country's amazing economic progress. Yet that means China is facing high costs at a time when trade protectionism is growing: It must focus on its environment, which has been greatly diminished by the nation's explosive growth, and it must address its ageing population's challenges while still offering opportunities to its millennials.
On Geopolitics and Finance
All the Presidents' Bankers: The Hidden Alliances that Drive American Power
By Nomi Prins
Who will really rule America in the President Trump era? Wall Street and the White House have a long history of interdependence that can't be dismissed merely as money driving politics—or greed driving bankers. For years, they worked together to champion the expansion of America abroad while focusing on the greater good at home. But eventually, the desire for profits trumped allegiance to public service and presidents lost control over the economy—as we saw during the Great Financial Crisis of 2007-2008. Will the changing political tide shift the establishment's alliances, or will these hidden partnerships continue shaping the nation?
Winter Is Coming: Why Vladimir Putin and the Enemies of the Free World Must Be Stopped
By Garry Kasparov
This book is still holding a place on my list of must-reads for a range of reasons, not least because 2017 marks the 100-year anniversary of the Russian Revolution, a major geopolitical event that still resonates a century later. At risk of drawing too close a comparison between the rise of the Bolsheviks and the state of today's political affairs, the world is clearly seeing a pronounced rise of populism and nationalism. Brexit and President-elect Trump have just set foot on the world stage, with LePen and others waiting in the wings. Meanwhile, President Vladimir Putin stokes nationalism in his own country as he carefully plots his next move. In this book, Kasparov outlines how the West has acquiesced in the ascent of Putin and his cronies, giving Russia's leader the ability to grow into an ever more powerful threat to local, regional and global affairs.
Smarter Than Us: The Rise of Machine Intelligence
By Stuart Armstrong
As an investment theme, disruption is one of the most dynamic forces at play today, presenting an existential danger for some industries while opening up game-changing opportunities for others. Just consider the disruptive auto technologies that will continue to boom globally as the industry embraces artificial intelligence—and then consider what might happen if AI becomes smarter than people. This book investigates the immense potential, both positive and destructive, that this new technology holds, and the ethical challenges today's scientists and researchers are confronting. Is humanity up to the challenge, and how can we as investors build portfolios that sustainably benefit from AI technology and disruption?
Our Final Invention: Artificial Intelligence and the End of the Human Era
By James Barrat
In just a few years, artificial intelligence could surpass human intelligence—the technological Holy Grail for many governments, corporations and scientists around the world. But what happens next? Could we be forced to compete with a cunning rival that has a fierce survival drive? This book delves into the dangers of pursuing advanced AI, asking whether we can coexist with beings that possess intelligence that dwarfs our own—and even whether "they" will allow us to. Perhaps Hollywood's dystopian movies may prove right after all.
Peering into the next 12 months, Neil Dwane looks at how 10 hypothetical events—including a "soft Brexit", the rise of "green bonds" and a Le Pen victory in France—could affect economies and markets around the world
At the beginning of each year, it can be useful to anticipate some market-moving events that could potentially occur but are far from certain to actually take place. Here are ten such scenarios that could play out in 2017.
1. Europe progresses
After a torrid 2016 political environment for Europe—starting with the surprising Brexit decision and culminating in a dispiriting "no" from Italy's voters—fears about the "dis-integration" of Europe may end up misplaced. If the elections Europe faces in 2017 affirm a constructive journey forward, political tensions could fall, confidence could grow about a "soft Brexit" outcome and progress could emerge. This, in turn, could help investment and employment to rise, which would be another important step toward a fully united Europe. Low valuations and reduced political risks might then combine to generate good equity returns.
2. Green funding takes off
Despite President Trump shifting US energy policy back toward coal and oil, global efforts to improve the quality of future economic growth could accelerate quickly thanks to "green bonds". Issued by governments and companies to sustainability-conscious investors, these securities promote lower pollution and cleaner water and energy systems. With the idea of climate change challenged by sceptics in the US, corporations and investors could instead join forces to promote investment in less carbon-generating or more hydrogen-powered opportunities, which would minimize ecological damage. For Europe, China could lead the way.
3. Fiscal stimulus boosts global growth
The realization that negative interest rates were a policy error has led to demands for a more fiscally stimulative set of economic policies globally. If enacted, they could help relax the investment tension created by a distorted environment of interest rates hovering near zero. The presence of populism, whether in Europe or the US, could combine with new spending to boost economic activity after a period of draining austerity and narrowing deficits. If successful, we could see more investment and lower unemployment as confidence increases.
4. "Ch-India" consumption takes off
With China rebalancing toward a consumption-based economy, and with reform movements converging in India and Indonesia, the world is witnessing the creation of a new consumer market with 4 billion people. Incomes here are expected to grow rapidly in coming years, with the "American dream" alive and well in the south-eastern part of the region. Global brands may lose out to more local and affordable Asian names, but the direction of travel seems set as this upward-looking market follows in the economic footsteps of Japan and Korea.
5. Active managers add alph
After a generally woeful year in terms of adding alpha in 2016, active managers could serve clients better by improving pricing and performance transparency, and by aligning costs more closely to meet client objectives. At the same time, the so-called "free costs" of passive investing could become unstuck as volatility widens spreads, lifts interest expenses, and reveals greater illiquidity and positioning concentration—all of which would further detract from indexed returns. Additional efforts to control high-frequency trading and implement extra financial transaction taxes, as well as the addition of MiFID 2 regulatory changes, could further increase costs, which would play to the strengths of the more skilful active stock picker.
1. Trump inspires trade protectionism
True to his campaign promises, Trump could introduce trade policies that "make America great"—but at everyone else's expense. NAFTA might be realigned, which would hurt Mexico, cause dramatic consequences for an already-collapsing Venezuela and reverberate through Brazil, which is already in the third year of recession. A stronger US dollar would, ironically, make life harder for Trump, so he could begin to target the key exporters to the US—China, Japan, South Korea and Germany, with the Asian countries feeling the painful effects as one.
2. The Middle East stays troubled
This region could easily become even more challenged in 2017. While the Islamic State may be targeted more effectively by its enemies, the recent coup in Turkey, the regional effectiveness of the Kurds, the disarray in Egypt and Libya, and the deteriorating detente between the US and Iran all hint at worse to come. For example, a new kind of Thirty Years War between the Sunni and Shia people still seems probable. Investors should be mindful that any of these developments may well underpin a stronger oil price.
3. "Solar minimum" causes another polar winter
While many weather-watchers focus on the El Niño and La Niña rotations in the Pacific, another key driver of global weather and temperatures is our sun, whose radiation and sun-spot activity may fall to record lows this winter. Despite occurring during a period of record agricultural abundance, the latest El Niño parched many major farm regions globally, leaving them vulnerable to a truly polar winter – which could reduce upcoming harvests. La Niña seems slow to arrive this time, raising fears about rising food prices and adding another leg to the reflationary inflation cycle.
4. Central-bank credibility falls
Some aspects of central-bank credibility failed in 2016 when negative interest rates did more harm than good in Japan and Europe. With Japan now adopting "fiscal dominance"—which makes monetary policy a slave to fiscal policy—interest rates may indeed remain low, but monetary policy could begin accommodating any and all fiscal desires of governments. Europe cannot follow this route per se, but with insolvent euro-zone banks still at risk, the European Central Bank will do everything it takes to keep economic growth moving forward—that is, until its efforts no longer work. The yen and euro should remain weak currencies until the US dollar changes course.
5. France chooses Le Pen
After enduring recent political shocks in the UK and Italy, Europe could be convulsed by the election of Marine Le Pen to the French presidency. Her suite of policies would be hostile to the EU, although some domestic gridlock should occur in France's National Assembly. With France uncooperative, Europe would remain directionless and unable to move forward, beset by populism across the continent, confused by the complexities of Brexit and unnerved by the apathetic attentions of President Trump—all of which could further undermine NATO.