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