Thanos Papasavvas is the Founder and CIO of ABP Invest. ABP Invest provides strategic outlook and research on markets, geopolitics, economics and FX and aims to blend economics and geopolitics with market analysis for a better understanding of financial markets. He shares his views on the geopolitical, market and economic developments that are impacting the global economy resulting out of the Covid-19 pandemic.
Covid-19 and geopolitics
Covid-19 has not only affected geopolitics, but has had socio-political influences as well, including a very direct impact in terms of inequality with education.
Industries such as finance, education, business services, etc. which have higher levels of expected tertiary education, can be done from home. The better educated you are, the more likely you’ll be able to work from home and consequently be less impacted by Covid. In the US, students’ performance by household income shows that before the first lockdown, students were broadly similar irrespective of their background household income. After lockdown, the data showed that students from a higher household income had better exam results compared to those from lower household incomes. This was attributed partly to the schooling, levels of technology and teacher engagement and to the fact that students from high household incomes had parents who tended to be working from home and were able to help them.
Another direct Covid impact was felt in the US elections. Democrats were more likely to vote by mail as opposed to Republicans, which turned the race from a Republican surprise early on to a later Democrat win when the postal votes were included. Although the presidential race has been decided, there will be a run-off in Georgia in January, to determine who will control the Senate. If Republicans win again as the markets expect, the Senate will remain Republican with the Administration having to propose more centrist policies and cabinet appointees. If the Democrats win, they will control the Senate and the House of Representatives and hence there will be a ‘blue wave’. This ‘blue wave’ will raise concerns in financial markets as it increases the probability of progressives shifting the party from the centre significantly to the left. This could have a significant impact on the Infrastructure Bill, domestic health care reforms, environmental laws, corporate taxation and Silicon Valley.
Key for the Biden administration is going to be his first 100 days in office. He will have several issues to deal with, including social health, economic, industrial and foreign policy as well as a Covid-19 task force. He will re-enter the Paris climate accord, reverse their departure from the WHO, reverse Trump’s travel ban for Muslim countries, etc. The more contentious issues will involve the choice of Treasury Secretary, Secretary of State and the Department of Justice and Federal Trade Commissioner as they will impact the economic and industrial policy. In terms of foreign policy, I think the US will re-enter the Iranian nuclear deal between Iran and P5+1, which they need to do before the Iranian elections in June 2021. I don’t think the tensions with China are going to change that much. Biden will be looking to combine the trade, technology and climate change discussions with China. Relationships with the EU will warm up, but I don’t see any big change. There is no longer a ‘special relationship’ with the UK given Brexit, Boris and the impact of Brexit on the Good Friday Agreement. I expect UK tensions to be a little more difficult and that they will move ahead with a skeleton agreement and cap further uncertainty.
The pivot in the new US administration is the EU and a potential pivot towards Macron and France. The geopolitics and the economics, driven by Covid, put together the new generation EU or movements towards a closer fiscal union. Covid has raised the need to consider supply chains and supporting/developing national champions. The EU has a single currency and same ownership policy, but not the same fiscal policy and I think they’re moving gradually towards that - although with questions from the frugal four. As the second largest economy after the US, the EU could benefit from a shift towards more regional and local presence, especially with Eastern Europe and the Balkans.
When it comes to Russia and Belarus, the West is unlikely to interfere with Belarus, especially with a significantly weaker NATO and an introspective and distant US. This will give Putin a relatively free hand on Belarus, but he’s likely to be softer than expected. Russia is exerting slightly stronger soft power and is more involved in the Middle East. I think Russia will come closer to the EU. It will be interesting to see what the relationship between Biden and Putin will be, which we think will be more positive than the markets think.
Trump was a game changer for the Middle East. Historical developments, brokered by Jared Kushner and Trump, will have significant political and economic impact. Turkey lost out on that deal as did the Palestinians who lost significant leverage.
Covid-19 and economics
I don’t believe we’re in the eye of the storm and don’t expect the doom and gloom that we saw earlier on in the pandemic to reappear after the second wave. This is because we’ve had unprecedented fiscal and monetary support from the central banks. Policymakers want to ensure social cohesion as the cost of managing huge unemployment, depression and social unrest will be far greater than dealing with 20%-30% levels of debt to GDP or the fiscal deficit moving from 5% to 9%. SMEs make up the backbone of the economy and is why the stimulus is significant in the major economies. Spain and Italy have been particularly hard hit as have the travel, entertainment, and accommodation and food sectors. The economic forecasts from the major institutions show that several countries are doing better than was expected.
Covid-19 and the markets
We have five key investment themes, which have not changed since the change in US administration.
1. We see a stronger Europe by necessity, forced to stand on their own two feet. Supply chains are coming back home, bringing everything closer.
2. Receding globalisation, where we expect a shift towards a multipolar world, especially as the EU becomes more independent and China continues to grow.
3. A strong China, which we expect to continue growing despite receding globalisation and ongoing tensions. We believe the resolve of the Chinese Communist Party to stay in power will shift the economic focus away from export led growth to domestic growth as well as seeking to build alternatives/replacements to US technology.
4. Inflation, where we expect prices to start rising from late 2021. Globalisation is receding and prices will continue to rise in terms of trade tensions and tariffs. Fiscal and monetary stimulus has been more broad and widespread than for the GFC and central banks want some inflation.
5. ESG, which has shifted from a marketing gimmick to being elevated to the forefront of investment thought.
We are currently more positive Germany. German elections take place next year and there is political will alongside the economic ability to maintain ample support, giving Olaf Scholz and opportunity for the helm. France may continue to be more adversely impacted by Covid-19, particularly given the social angle, raising potential concerns for the 2022 elections.
We remain positive China, expecting the broader region to benefit including South Korea and Australia. Recent tensions with Taiwan were expected following the sale of US arms, but we don’t foresee any significant escalation in the near term. We believe China will ensure growth and social cohesion, which will be imperative for sustaining the Chinese Communist Party in power. We think Biden will ease tensions but not reverse them.
In terms of interest rates, we remain negative US 10-year bonds and expect the steepness of the yield curve to continue. High yield remains our favourite fixed income asset class and we remain neutral on emerging markets. This is the first crisis where emerging market central banks could actually cut interest rates.
We are positive commodities in general and copper in particular. We remain positive oil as we expect the price to return to the $50-$60, which will be a more appropriate range for the three key parties – US, Saudi and Russia. We have held on to our positive copper outlook given a stronger China and continuing fiscal and monetary policy support globally.
We’re negative on the US Dollar, given expensive valuations and with no expectations of interest rate support in its favour against either developed or emerging currencies. The unprecedented fiscal and monetary stimulus should provide support for the broader global economy albeit not at the speed expected by some asset classes. We are positive the Euro, which has appreciated significantly off the back of the EU’s political developments this year and the Fed’s confirmation of keeping interest rates at all-time lows for some time to come. The Renminbi (RNB) has strengthened on positive economic developments, which continue to support the Chinese economy. We expect the RNB’s increased status amongst reserve currency holdings to increase from its current 2%. We are positive on the Mexican peso, which remains one of our favourite emerging market currencies with a credible central bank and a left-wing populist politician with conservative economic policies. We are neutral on the Rand for the time being despite the Rand strengthening over the past few months, driven mainly by global sentiment and EM currency appreciation and domestic developments. Domestic structural reforms are still to be addressed with power shortages and corruption in the mix.