Geopo­lit­i­cal re­ces­sion chang­ing the world

With the rise of pop­ulism in the West, uncer­tainty abounds, and po­lit­i­cal in­sight becomes cru­cial for in­vestors.

Finweek English Edition - - THE WEEK IN THE NEWS - Ed­i­to­rial@fin­ By Mariam Isa

po­lit­i­cal­risk and pol­icy uncer­tainty in South Africa have not been greater since the ad­vent of democ­racy. But the tur­moil that is roil­ing do­mes­tic in­vestors now is in step with a dis­rup­tive global trend that looks set to be­come the “new nor­mal” for years to come.

Last year de­vel­oped mar­kets like the US and Europe, which have been tra­di­tional safe havens for decades, were dis­rupted by shock elec­tion out­comes and un­ex­pected po­lit­i­cal events that have made them as risky as emerg­ing mar­kets – if not more so, an­a­lysts main­tain.

A tra­di­tional world or­der based on pre­dictable lead­er­ship, solid global in­sti­tu­tions and an­tic­i­pated voter be­hav­iour has con­tin­ued to dis­in­te­grate this year – mak­ing in­vest­ment decisions in­creas­ingly dif­fi­cult and costly for both companies and in­di­vid­u­als. Glob­al­i­sa­tion is un­der at­tack as dis­il­lu­sioned elec­torates choose lead­ers who are less in­clined to make mu­tu­ally ben­e­fi­cial deals with other coun­tries.

Geopo­lit­i­cal re­ces­sion

Sean West, global deputy CEO of po­lit­i­cal risk con­sul­tancy Eura­sia group, be­lieves that the world has en­tered what he de­scribes as the first “geopo­lit­i­cal re­ces­sion” since World War II, char­ac­terised by the in­abil­ity of global lead­ers to de­liver.

“Eco­nomic re­ces­sions are cycli­cal – they don’t de­stroy in­sti­tu­tions in the process. They may ul­ti­mately lead to a pos­i­tive tra­jec­tory,” he told a dis­cus­sion panel hosted by KPMG in Jo­han­nes­burg re­cently. “Geopo­lit­i­cal re­ces­sions are a bit dif­fer­ent – if they dam­age the struc­tures and in­sti­tu­tions in the process, when you emerge on the other side you emerge into a dif­fer­ent world.”

The key mes­sage for in­vestors at this point in time was that their decisions had to be based on risk man­age­ment, not find­ing new op­por­tu­ni­ties in places where things were going well, he said. If companies were op­er­at­ing in coun­tries where pol­i­tics were sim­ply not de­struc­tive, that was pos­i­tive, he added.

The elec­tion of Don­ald Trump in the US last year and the Brexit vote in the UK ap­peared to sig­nal that the rise of pop­ulism in the West was over­whelm­ing and un­stop­pable. Europe was seen as par­tic­u­larly vul­ner­a­ble, with elec­tions loom­ing in the Nether­lands, France and Italy amid grow­ing sup­port for pop­ulist and far right can­di­dates.

Spread of pop­ulism stalls in Europe

But once again, the un­ex­pected hap­pened. Dutch Prime Min­is­ter Mark Rutte beat his anti-EU chal­lenger Geert Wilders with a com­fort­able mar­gin, while Em­manuel Macron swept to vic­tory in the French pres­i­den­tial elec­tion on the wings of En Marche, a cen­trist po­lit­i­cal party that he had founded just a year be­fore.

Ger­man Chan­cel­lor An­gela Merkel now looks set to be elected for a fourth con­sec­u­tive term while in Italy – which is still viewed as Europe’s big­gest po­lit­i­cal risk this year – for­mer Prime Min­is­ter Mat­teo Renzi as­ton­ish­ingly re­gained the lead­er­ship of his gov­ern­ing cen­tre-left Demo­cratic Party five months af­ter be­ing forced to re­sign.

Then early in June, Bri­tain’s Theresa May lost an over­all ma­jor­ity for her Con­ser­va­tive Party in a snap elec­tion that was ex­pected to ce­ment her author­ity to ne­go­ti­ate a favourable Brexit deal with the EU.

With pop­ulist pol­i­tics on a back­burner, there are grow­ing per­cep­tions that Europe could be a bet­ter place to invest than the US, where Trump’s er­ratic be­hav­iour car­ries on as some of his elec­tion pledges for the econ­omy prove to be more dif­fi­cult to achieve than he had an­tic­i­pated.

Europe look­ing more at­trac­tive than US

At present, the eu­ro­zone econ­omy is grow­ing faster than its US coun­ter­part and many an­a­lysts think the trend will carry on as the re­gion’s re­cov­ery from the global fi­nan­cial cri­sis be­gan later than in the US. By the same to­ken, Euro­pean stock mar­kets look more ap­peal­ing as eq­uity val­u­a­tions are cheaper and emerg­ing mar­kets could be back in vogue af­ter a period of be­ing tar­nished by lower commodity prices.

But af­ter a period in which opin­ion polls have proved wrong over and over again, noth­ing is cer­tain and an in-depth un­der­stand­ing of pol­i­tics, so­ci­ol­ogy, and even psy­chol­ogy is now es­sen­tial, in­vest­ment an­a­lysts say.

“Business lead­ers feel that they are in a per­ma­nent cri­sis – they don’t have a de­pend­able set of as­sump­tions they can work off,” West said. “The CEO should also be the com­pany’s chief po­lit­i­cal of­fi­cer […] they must as­sess the pol­i­tics in the places they’re going and build it into their strate­gic plan­ning process.”

Companies should also cre­ate ge­o­graphic hedges and be able to up­root them­selves quickly from coun­tries that could rapidly im­plode, or that are likely to be neg­a­tively af­fected by a trade pact or global in­sti­tu­tion which sud­denly ceases to ex­ist, he added.

To add to the dis­rup­tive equa­tion, new tech­nolo­gies, ro­bot­ics and ar­ti­fi­cial in­tel­li­gence are set to de­stroy mil­lions of jobs across the world, adding to widen­ing social in­equal­ity and voter dis­con­tent.

Cy­ber con­flict is be­com­ing a big­ger threat and the rise of social media, to­gether with tech­nol­ogy, is speed­ing up po­lit­i­cal cy­cles. (Also see page 42.)

With pop­ulist pol­i­tics on a back­burner, there are grow­ing per­cep­tions that Europe could be a bet­ter place to invest than the US.

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