Key takeaways include:
interaction of populism and the anti-vax movement could delay pandemic response
in the U.S. and Europe by more than is current anticipated.
• The erosion
of U.S. soft power has led countries to repeatedly test the limits of the
country’s commitments and strength around the world. China is a rising power
and competitor, while Russia is the spoiler in this trend. Watch Taiwan and
Eastern Europe for potentially negative surprises.
will ebb for a time because populist leaders were ill-equipped to deal with the
pandemic, being largely anti-expertise and anti-science. But it is only a recession
away from resurging—and potentially in a more virulent strain.
• Middle East
outlook is mixed with some positive trends emerging. A restart of the Iran
nuclear accord is high on Biden’s list of priorities. The breakout of peace
between Israel and the UAE is one of the Trump Administration’s success
stories. Normalisation with Saudi is politically difficult, but ties are
• Brexit could
take longer to play out than expected; recent comments from the Bank of England
have underscored the fact that Brexit’s negative economic impact could be worse
than that of the pandemic. The two together are an economic double-whammy.
We hope you find the views insightful.
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Pandemic, U.S. Election and
markets have taken the Trump Administration’s legal challenges to the election
results in stride because few are surprised that the election has been
contested. Biden’s robust victory margin means he will be inaugurated on
January 20, though this will be the most unusual and disruptive “lame duck” period
in modern US history.
bigger risk for investors is that a difficult transition undermines the U.S.
government’s effort to fight the intensifying pandemic. A few months’ delay in
sharing information, coordinating the transition, and setting up systems to
deliver the vaccine will significantly impact fatalities and the policy
response. Near term, it also makes it tougher to get much-needed fiscal
stimulus to offset pandemic headwinds until vaccine uptake is widespread.
have been able to look beyond the pandemic and focus on good vaccine news. This
assumes the government will have a competent rollout. The U.S. has among the
best systems and capacity for pandemic assessment and response. Yet all that
wealth, innovation and technology has not helped. That does not just reflect a
lack of leadership, it is also a lack of investment in crisis response
populism poses a risk that the developed world will take longer to recover from
the pandemic that we expect, because of the movement’s links to the alarming
acceleration of the anti-vax movement. As many as 50% of Americans say they
will not take a vaccine. For example, Nigel Farage, who gave us UKIP and the
demand for the EU Referendum, has founded a new political party with the anti-mask
movement at its core. Populist leaders
and movements are accelerating that mistrust in large European countries like
Italy and Germany.
wave of populism will ebb and flow, but it brings up broader issues than just a
slower pandemic response. Its leaders have looked incompetent in the pandemic
crisis, with their mistrust of scientific expertise, unwillingness to mandate
mask-wearing and sympathy with the anti-vax and anti-science movement.
populists morph and adapt. They can take the issue du jour and mix it with the
usual grievances. The universal element of populism is the differentiation
between the “real, authentic” people who perceive themselves to be abused by
elites—political, academic, media and/or business-- who have rigged the system
to their own benefit. It is a latent set of beliefs that coalesce around
mistrust of elites, mistrust of expertise, and the notion that the system is
rigged. A charismatic leader can manipulate and galvanize this latent force,
especially in the context of a recession—particularly where blue and
white-collar worked are negatively impacted.
US-China trade war was disruptive, resulting in a major catalyst for market
volatility. Global investors and political leaders will get a more predictable,
even boring, foreign and trade policy under Biden, without much strategic
change. Historically, Democrats are linked with labour, pressuring China over
unfair labour practices and human rights as well as threatening to label the
country a currency manipulator. That is a newer development for Republicans.
President-Elect Biden will continue to talk tough on China, but without
Trump-style, personality-dependent destabilizing tactics. During the George W.
Bush administration, Hank Paulson led the strategic and economic dialogue,
continuing through the two terms of the Obama administration. Look for that
kind of peer to peer format between US and Chinese officials at the Treasury
and State department levels to help manage relations in a more consistent and clearly
Trump strategy has been tactical, but European and Japanese policymakers are
privately pleased that he took the flack for getting tough with China. This
suggests that a Biden administration will find it easy to restore natural
alliances with many countries that have gripes with China. It would be pushing
on an open door. The Obama administration was on the cusp of signing the
Trans-Pacific Partnership agreement that called for trade, security and other
kinds of collaboration, which was immediately torpedoed by the Trump
administration. Of course, Biden must walk the line between being pro-free
trade and its labour constituency. But free trade is appealing in a slow growth
environment. It may surprise many that US public support for free trade has
gone up markedly during the first Trump term.
risk investors ignore is what China can do; during the course of its stated
strategy of “peaceful rise” Beijing has been quite constrained—until recently.
The Chinese are getting more expressive about their unhappiness with external
interference, not just in their internal affairs, but regionally. Just last
week, they criticized perceived interference in Hong Kong and the pro-democracy
protests. Do not ignore 20th century style geopolitical tail risks like a
confrontation in the Straits of Taiwan, or other measures to change the facts
on the ground in the region, to test the Biden Administration’s military red
lines, which did not happen during the Obama administration. To expose the
United States’ security umbrella as a “paper tiger” would be a huge
transformational development, and it could happen by accident.
Risks from Eroding U.S. Soft
generally, the U.S. hegemony as the sole military superpower is ending. It is
no coincidence that a number of frozen conflicts have relapsed, like
Armenia-Azerbaijan, Ethiopia and Morocco-Algeria. By themselves, these
conflicts are not worrisome for investors, but they hold insights for conflict
in a world where the hegemon is losing control, and for the future of conflict
in the 21st century.
of the consequences of this erosion of US soft power and hard power is that
more countries will test US resolve and act without asking for Washington’s
blessing. And over time, there is a change in the facts on the ground and in
expectations, and it means that the trend of “rules of the game” eroding
becomes more evident, until there is a more significant challenge. They’re just
going to keep testing, and testing, and testing. The Armenia-Azerbaijan
resolution was a territorial power grab. Turkey, a NATO member-state, supported
the Azerbaijan military against the Russian-backed Armenian military which also
involved the use of drones. That success might encourage Turkish designs in the
Eastern Mediterranean, where there are gas fields involved.
this with the conflict in Ukraine, which was perceived as threatening Russian
interests and led to Russia annexing Crimea, the most important strategic bit
of Ukraine, at the risk of spurring an anti-Russian backlash. That didn’t
impact markets because Ukraine is not a NATO member-state, and therefore
Article 5 protection doesn’t come into play, but it has resulted in sanctions
against Russia that continue to this day as well as the worst decline in
relations between Russia and the west since the collapse of the Soviet Union.
if there is a Crimea-style event, but involving a country that was explicitly
under Western or US security umbrella, which is why I raised the idea of an
attack or a confrontation in the straits of Taiwan? There have been historic
guarantees by Washington to protect Taiwan if attacked by China. Taiwan has
been under increasing pressure in recent years. And so a big question becomes,
if there were to be a security incident involving Taiwan, would Washington make
good on its promise? Because if it did not, it would matter for regional
security across Asia, not just Taiwan, by signalling that China is the regional
hegemon. This is what drives foreign security policy and how we assess when
conflicts or skirmishes or confrontations have the potential to spill over from
minor regional conflicts to systemically significant ones.
is a strategic competitor, but Russia is a spoiler. I started my career as a post-Soviet
expert and a student of the post-communist transitions. Putin’s leadership over
this extended period has evolved. We had the Putin Era when Russia joined the
G8 and the WTO. But since 2008, with conflicts in Georgia and then Ukraine,
leading to sanctions, Russia has had a strained relationship with the West.
Plus, Russia is under further pressures because of lower oil prices and
diminishing economic power, unlike China.
Kremlin has always wanted to avoid aligning more closely with China, bringing
the risk that Russia just supplies raw materials to a rising China. But China
and Russia share the overarching ambition to be regional hegemons in their
space. That raises the spectre of further territorial grabs, such as eastern
Estonia, if there were to be some confrontation between Russian speakers, the
Russian minority in the Baltic States. The Baltic States are NATO and EU member
states. Would there be a confrontation, or would Russia be allowed to change
the facts on the ground, which would redraw of the map?
the positive side, the Middle East is looking better. There are warmer
relations between Israel and the Gulf states. Looking forward, the Biden
Administration could by executive order return to the P5+1 nuclear agreement.
Iran was relatively well-behaved and has been hit hard by the pandemic. Look
for the continuation of low-intensity conflict in a number of countries, such
as Iraq, Syria and Lebanon, but improved prospects for regional trade and
commerce, and kind of breaking down some of these barriers that have really
held the region back.
end game is approaching after four years of Brexit Groundhog Day. Investors
have been complacent, because every few days another deadline passes without a
calamity. Most observers and UK investors expect a “skinny deal”, a narrow set
of agreements to paper over the worst, but not a properly developed agreement.
risk that investors are not even discussing is that Johnson’s government delays
Brexit because of “extraordinary circumstances”, blaming it on the pandemic.
Consider the political shifts since Boris Johnson won a landslide victory in
January with a mandate to get Brexit done. There have been 50,000 coronavirus
deaths, public finances are strapped, and the prime minister has appeared
incompetent. Brexit is the world’s most prominent example of voluntary
de-globalization in history, carrying risks for the world as well as a stress
test for the UK government. His government came to power with a mandate of
“getting Brexit done”, but they didn’t bargain for a global pandemic.
Big Picture Trends
for below-the-radar pivotal developments, even if they are not immediately
market-moving. Anything that changes the facts on the ground from a territorial
perspective has the potential to lead to further escalation or confrontation.
refers to states projecting power beyond their borders. Increasingly, countries
are not projecting their geopolitical power through hard power, state-to-state
conflicts, even though they continue their military build-up. Political tension
and conflict are increasingly conducted through cyber avenues, like election
interference, misinformation, disinformation and propaganda as well as the use
of drones and sanctions.
avenues have changed, but the bigger question is how the current set of leaders
decides to project that power. Investors underestimate what China might do to
be opportunistic. It is a rising power. It is not inclined toward military
conflict, but it is starting to become more assertive in its region and is also
investing hugely in its military capabilities.
this a flashing red light for investors. Political leadership, consensus and
capacity are fragmented. Right now, the pronounced disconnect between politics,
economics, and market performance is a warning signal. Almost wherever we look,
we have poor leadership and state capacity to respond to the threats we are
experiencing, even in the wealthiest countries in the world. It turns out that
the wrong type of crisis was anticipated.
I advise clients not to think about political outcomes in binary terms, that if
the red guy or the blue guy wins, that outcome therefore implies a specific set
of pro- or anti-market policies. Increasingly, people are not loyal to
political parties. They switch all the time. In the US case, that is evident in
the continual rise in the number of registered Independents, some of whom
might, for example, vote specifically for Trump rather than for Republicans in
leads to what I call political cross-dressing; in other words the mixing of
policies from the left and the right in new ways. Trumpism has very little in
common with the traditional Republican ideology of free trade and free markets.
It’s a mix of some aspects, like lowering taxes, and with protectionism and
obsession with elections and election outcomes is a red herring to anticipate
where policy is headed. Look at sentiment, not investor but human sentiment;
public opinion, trends and changes in what I called the demand side of the
political equation. So, what the public wants, the grassroots, the bottom up,
not just what the leader says they will do. We must track public opinion,
demographics, the increasing pressure on corporates, for example, to do more to
address inequalities and these kinds of things. Because those factors are going
to be what slowly, but surely, changes the investment environment over time.
final comments on the U.S. elections. Most of the ambitious, progressive Biden
agenda will not happen if, as seems likely, Republicans win at least one of the
two remaining Senate seats in Georgia’s January 5 runoff elections. On the plus
side for investors, the Trump tax cuts will stay in place and re-regulation
will be limited. The downside is that Democrat-funded stimulus, including
much-needed infrastructure spending, also will be minimized. Suddenly,
Republicans are getting religion again on deficits and the Tea Party phenomenon
will come out of a 4-year deep freeze in time to clip Biden’s wings spending.
look for the status quo to rule. The Biden Administration will rejoin the COP21
Paris Agreement on climate change, but a Green New Deal faces tough hurdles, as
will reinstating Dodd-Frank and financial services reregulation. The Biden
Administration is unlikely to reward progressives with high-level appointments
for Senators Warren or Sanders, which would spook markets. Good news for banks,
energy and pharma, but it also points to a weak presidency and lack of
pro-growth or equality-oriented agenda.
tech regulation will take time. Tech is complicated and many in Congress do not
understand the nuances. The technical competence and quality of EU competition
commissioners is absent in Congress.
further out, investors underestimate the normalization of extreme tactics and
erosion of democratic norms. We may never have a normal US election again, with
every election contested and months before handovers. This raises the odds of
policy errors and miscalculations that will shock financial markets.
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Global Political Strategy
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