Takeaways from Our Hong Kong Investment Forum
Twice a year, our investment professionals from around the world meet at our Investment Forum to exchange ideas on the issues that matter most to our clients, including new macroeconomic and market developments and long-term investment themes. Our first Investment Forum of 2017 was held in the vibrant city of Hong Kong – a fitting location for an event with China as the lead agenda topic. Here are some of the highlights of our discussions.
The state of the global economy
Although global economic growth has remained somewhat dull, it accelerated slightly in the second half of 2016 – and the markets responded. Reflation hopes soared after Trump’s victory, despite uncertainty about his priorities. If Trump successfully lowers taxes, reduces regulations and increases infrastructure spending, the US should be able to extend its late-cycle growth. Globally, rising bond yields and a higher oil price are also cause for optimism. Of course, there are also legitimate reasons to be cautious. As the memory of the Great Financial Crisis recedes, global debt levels are rising. Moreover, euro-zone banks continue to appear risky, and we expect the central banks of both Europe and Japan to row back on their negative-interest-rate policy errors.
China: Confronting challenges and making changes
Although not without its issues, China is making the necessary changes to succeed in the long term. Consider how China battled deflation and a commodities collapse: Their aggressive monetary-policy changes successfully restored profits, inflation and the profitability of state-owned enterprises. Moreover, China is at least confronting key structural issues by “rebalancing”, and while high debt and slower growth are problematic, China acknowledges the need to reform and has the will to do so – unlike Europe. Still, Trump presents a wild card: His policies could hurt trade relations, China’s “One Belt, One Road” policy and China’s longer-term regional ambitions. In the end, however, China’s overall trajectory is clear: It boasts the second-largest economy in the world and is set to assume a greater share of the world’s leading market indices.
Disruption is more than a tech trend
Artificial intelligence (AI) has been an enticing tech story since 2012, when machine learning, new algorithms and processor advances aligned with deep storage capacity. Although AI is in the early adoption stages, it is contributing to faster automation of previously manual work. This disruption could lead to efficiency gains, but it could also exacerbate income inequality, prompting governments and regulators to step in. Companies that thrive off disruption could also shift the investment trend away from indexing: With the top 20 per cent of companies accounting for all of the US market’s gain in 2016, actively picking stocks looks like a much more attractive proposition. For our part, our research team is adapting to this theme by implementing new “disruption ratings” on the companies we cover. We may find that future success in any industry requires embracing a new mindset: You will be disrupted, so get busy disrupting!
Populism and protectionism power new politics
As part of the changing political trend that is moving away from globalization and free trade toward populism and protectionism, European politics will take centre stage in 2017: Brexit negotiations should begin in earnest and a “super election cycle” will roll through the Netherlands, France, Germany and possibly Italy. Regardless of Brexit’s ultimate shape, the European Union (EU) may be keen to help the UK make its exit before the EU’s Parliamentary elections in May 2019. Another factor pressuring the region is that many feel the EU has too many members and therefore must “shrink to grow”. So while it is possible for Europe to muddle through 2017, the EU needs to build a vision and roadmap that is sustainable – and the clock is ticking. In the US, politics could play a major role in the future course of monetary policy: Trump may have an opportunity to appoint six out of seven members of the US Fed’s Board of Governors.