Blog James Sweeney: There is an unrecognized disruptive trend that investors should focus more on
What has been the biggest disruptor to the global economy over the past 12 months and its impact?
James Sweeney: The biggest disruptor to the global economy over the past 12 months has been the increase in trade and other tensions between the US and China. Trade in Asia fell sharply in the fourth quarter of 2018 as many investors anticipated US tariffs of 25% on US$200bn in Chinese exports. It appears that many firms in Asia cancelled or delayed orders due to fears that tariffs would rise. When the tariffs did not rise, some stabilization in sentiment occurred, but in general, investors can be less assured of a constructive US-China relationship compared with 12 months ago.
Disruption can come from many sources. When it comes from new technology, some businesses and jobs are likely to be displaced, but overall economic output should improve, softening the blow. But when disruption comes from politics, it lowers general confidence in a stable business environment, and can lead to less risk taking.
The intersection of debt dynamics, the end of an era of quantitative easing, and a new period of tight labor markets, acting in concert, is an unrecognized disruptive trend that investors should focus more on.
What disruptive trends are investors not paying enough attention to and why?
JS: After ten years of quantitative easing across many economies, many investors are convinced that government debt levels do not matter, because “central banks can always buy the debt.” But when economies operate at full employment, central bank bond buying may lead to inflation, currency depreciation, or both, and central banks’ primary objective is price stability. The US government’s interest bill as a share of GDP is likely to increase by 100% or more over the next half-decade. Increased borrowing will be driven by demographics and entitlement spending. Similar dynamics are at work across developed market economies. And yet, long term interest rates are low. The intersection of debt dynamics, the end of an era of quantitative easing, and a new period of tight labor markets, acting in concert, is an unrecognized disruptive trend that investors should focus more on.
What region will be the biggest source of disruption to the global economy in 2019 and why?
JS: In 2019, we expect the US to become less aggressive on trade policy. We expect European growth to improve somewhat. And we expect Chinese policy reactions to recent growth weakness to help to stabilize the local economy. The greatest source of disruption is likely to come from a range of technologies being developed in both Asia and North America. These include electric vehicles (whose sales have sharply increased), ongoing developments in genetics including the use of CRISPR, the rollout of 5G networks, and the continued innovation from technology firms that use algorithms to help business find efficiencies. Beneath the surface of all the macroeconomic noise is the microeconomic developments being pushed, especially by American and Chinese firms, that are changing the world economy. So the region that stands to be the biggest source of disruption will be the Pacific!