Shaun Riordan | I have been reading a whole series of market forecasts for 2019. While it is relieving that at last they include political or geopolitical factors, I was struck by those factors, which could have dramatic impact on companies or markets which were left out, or misinterpreted.
Firstly, China, which seems to be mentioned only in the context of the trade war with the US. While a full blown trade war with the US would indeed impact on both markets and the global economy, that is merely to state the obvious. More interesting is to assess to what extent such a trade war is likely, and what are the factors that influence its outcome. This requires a deeper understanding of China, and the role of the Chinese communist party, and its leader Xi Jinping.
We must remember that the name of the country China in Chinese is the “central country” (zhongguo – “China” is simply a western name derived from the Qin dynasty). If Trump´s slogan is MAGA, “Make America Great Again”, then Xi Jinping´s slogan is “Make China Zhonguo Again”. The aim of Chinese foreign policy, including the Belt Road Initiative, is to re-establish China as the centre of its own international political and economic system. In one sense, this means that China should be seen not only in terms of its conflict with the US, but also in terms of its deep infiltration into other countries in Asia, Africa and even Europe (eg in the Balkans and Eastern Europe). In another sense, combined with the Chinese Communist Party´s promise to end the 200 years of humiliation inflicted on China by the west, and the vulnerabilities of Xi´s own very personalised rule, this makes it hard for China to back down without risking the collapse of the communist regime.
Which brings to a second factor rarely mentioned in these analyses: Trump unchained. The departure of Jim Mattis from the Pentagon next week is widely seen in Washington as the last adult leaving the White House. There is now no-one interested in or capable of restraining President Trump. He seems to have decided that his best chance of re-election, and fighting off the risks of the Mueller inquiry, is to return to his base and his key election promises: build the wall, withdraw from Syria and Afghanistan and stop its allies from ripping the US off. For this he is willing to close down the federal government. This is bad news for both the EU and NATO. What the market analyses may be underestimating is the risk of new tariffs being imposed on the EU by Trump unchained, particularly on the German car industry. In relation to China, Trump´s reversion to his base is likely to result in ramping up the rhetoric on the theft of intellectual property and unfair trading practices, and doubling down on tariffs. While many European politicians and diplomats seem traumatised by Trump´s first two years in the White House, with “Trump unchained”, we may have “seen nothing yet”.
And then there is Russia, which seems to have escaped the notice of market analysts. Russia recently seized Ukrainian naval ships and crew as part of its conflict with its Black Sea neighbour, it continues cyber operations trying to influence elections in the US and Europe, as well as seeking to disrupt daily life in its neighbours, carries out assassinations in the UK, increasingly uses air and naval operations to molest NATO members and , with the withdrawal of the US, has become a key player in the Middle East. Russia´s economy remains vulnerable, dependent on the oil price and struggling with western sanctions, which always increases the temptation of foreign adventures to distract attention from domestic woes. The chances that Russia undertakes some kind of operation against the west in 2019 that spooks markets is high.
Reflecting on Russia draws attention to another startling lacuna in these analyses: the absence of any mention of cyberspace. Cyber operations, ranging from disruption to espionage and crime, are increasing all the time. Cybercrime is already rated the third most expensive form of crime at a global level. There is no reason for thinking that cyberoperations of all kinds will continue to expand at all levels in 2019, and that companies will continue to suffer attack that impact on their share value. At some point, analysts will have to include this in their forecasts of market performance and risks. It is more relevant that forecasts of growth from a broad range of institutional models that have already demonstrated their unreliability in the past.
And we haven’t spoken yet of Turkey, or Saudi Arabia or Iran … I would be the last to complain of the inclusion of political and geopolitical factors in market and economic predictions for 2019. Indeed I have argued for them. However, there seems to be an assumption that anyone can do them, without a solid background of geopolitical knowledge and understanding. No-one would invite an amateur to provide a technical market analysis. The same should be true of political and geopolitical analysis.