•  Yet again and despite the fillip of collapsing oil prices, projections for global growth have been revised downwards – to 3.5% this year and 3.7% in 2016, down from respectively 3.8% and 4% last October (IMF). The largest growth downgrades concern Russia (-3.5 percentage points), Brazil (-1.1), the Middle East (-0.6) and Sub-Saharan Africa (-0.9). In the words of Christine Lagarde, “the global economy risks getting stuck in a new mediocre” – a prolonged period of slow growth and feeble job creation.
  • 2015 will be a year of rising, acute volatility in the global economy and financial markets. Leaving aside the numerous economic, geopolitical and societal tail-risks likely to hit here and there, oil prices and currencies will dominate the news – these two tectonic plates have the potential to shift everything!
  • The abandonment of the peg to the € by the Swiss National Bank (SNB) is a case in point. The SNB just persuaded itself that a strong CHF is the lesser of two evils, and in the process threw to the dogs any belief in the omnipotence of Central Banks. This decision means the following: (1) Possessing the attributes of a “safe-haven” – a good reputation, good institutions and good governance – may turn, ironically, into a liability; (2) it is incredibly hard to fight deflation in a globalized world; (3) monetary policy is now tougher to conduct in other countries.
  • Another related example, that epitomizes the divergence in monetary policies among the major economies, is the ECB announcement of quantitative easing (QE). The programme is no panacea, but a good start.
  • As we enter a new year, let’s remember that at this time last year, there was a 100% consensus that interest rates would rise in 2014. This forecast was 100% wrong… This year, could it be that global bond yields will be compressed even lower by deflationary pressures? Will the unprecedented experiment of negative interest rates persist, with all the distortions for the financial markets and the real economy this entails?
  • Five years after the onset of the Eurozone (EZ) crisis, the victory of the leftist, anti-austerity Syriza party is the first tangible manifestation of economic pain mutating into political risk. The future is now wide-open, but Tsipras (the new PM) may be a Lula rather than a Chavez. Renegotiating the debt (80% of which is in the hands of the Troika: EC, ECB + IMF) will be thorniest issue. However, the much-touted figure of Greek debt standing at 175% of GDP is not as in-surmountable as the number suggests: with a very low interest rate and a 16-y maturity, Greek debt re-payment is less onerous on its economy than in Italy, Ireland or Portugal. The only certainty: the game of chicken between Greece and the Troika will last for most of 2015 – a tumultuous and treacherous year for the EZ. Accordingly, uncertainty, volatility and bouts of instability will prevail.
  • Syriza’s victory, and its celebration by lookalike parties (like Podemos in Spain) and most of the European far right (such an odd alliance!) portend a much broader trend with global ramifications: aggregate economic growth seems no longer sufficient to contain the rise of populism, or guarantee political stability.
  • The sentiments of frustration and unfairness are the real drivers behind the backlash against rising inequalities. This is a big, global problem without an obvious solution because in today’s digital world, the winners are those who innovate with new ideas, products and services, not those who provide cheap labour or ordinary capital. Their distribution of income follows a power law: very few get most of the rewards.
  • The media and punditry give the impression that theEZ is all doom and gloom. Wrong! Spain, for example, proves that deflation can coexist with rising demand (private consumption is up 2% Y-o-Y; a similar, but more nuanced situation exists also in Ireland and Portugal). This suggests two things: (1) structural reforms can revive animal spirits; (2) the EZ economic outlook is not great, but, with the support of a lower € and lower oil prices, better than the general perception.
  • The overwhelming consensus on oil prices is: they’ll start rising again at end of this year or early next year – as major exploration projects get cancelled. The CEO of ENI even warned that prices could hit $200 per barrel within 5 years … The Saudis beg to disagree, expressing “anxieties” over the long-term oil demand outlook. They argue that forecasts are based on traditional economics (linear projections for growth, etc.) and ignore the growing relevance of societal and environmental issues in the demand for oil.
  • We just participated in a gathering on cyber-security. Its outcome in a nutshell: there is a new “arms race” between cyber-offense, getting easier, and cyber- defence, getting more difficult. Experts think the risk will increase over the next three years. To be properly protected against cyber-attacks is very costly, but the cost of not doing so can be devastating.
  • Saudi Arabia’s smooth succession (with Salman, 79, as the new King and crown-Prince Muqrin, 69, as his deputy) conveys an impression of continuity, but the kingdom’s apparent stability conceals growing structural vulnerabilities and fragility. It faces a myriad of challenges, ranging from the deterioration of its strategic environment (plunging oil prices, collapsing Yemen, Shia-dominated Iraq, etc.) to the threat that the Internet poses to a centralized and gerontocratic system of governance.
  • There is no better gauge of global sentiments than the WEF Davos Annual Meeting that took place last week. What is the conventional wisdom among global decision-makers and investors? Their two biggest concerns – leaving the economy and financial instability aside: rising inequalities and climate change. They like: the US economy, long $ / short € and ¥, India, technology and all the themes supported by global mega-trends (wellness, ageing, sustainability, food and water, etc.) They dislike: (most) emerging markets, energy / commodities exporters and all related assets.
  • Our list of major “must-watch ”issues for investors and decision-makers: (1) growth deceleration in China and its inevitable knock-on effect; (2) deflationary pressures and rising political risk in the Eurozone (with a focus on Greece); (3) currencies’ shifts – falling commodity prices; (4) a possible “distress loop” in the high-yield bond markets (watch $ risk in EM corporate debt); (5) global geo-political turmoil, with a focus on Ukraine / Russia. For real-time or in-depth analysis on any of these, and if you are interested in prediction markets to better forecast some of the risks, please contact us.
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