Sluggish Growth, And A Host Of Political Challenges Ahead

Global prospects for growth remain sluggish at best, in spite of reduced expectations for Fed fiscal tightening and a moderate recovery in oil prices. One can expect growth to continue to be hindered by economic uncertainties in the US, questionable central bank policies, and the Chinese slowdown. And on top of it all, political risks also still abound.

Global growth lacks impetus

After a turbulent start to the year, financial markets have benefited from a lull between March and early June. The oil price recovered part of its losses suffered during the downward spiral recorded at the end of 2015 and beginning of 2016, mainly due to a drop in production in some countries. Global equity markets have generally somewhat stabilized. Equally, the currencies of major emerging markets have bounced back to a level of normalcy. Their debt risk premiums have fallen considerably, and returned to more normal levels. Eurozone interest rates of “core” countries have reached new lows.

It is a sign of our paradoxical times that financial markets appeared to calm down in response to underwhelming economic performance reports from the US, which were interpreted as a clear indication that fiscal tightening by the Fed would be once again avoided. So addicted are financial markets to cheap money, that bad fundamental indicators in the US are seen as a good thing. That is all that Wall Street needs in building momentum for the next rally.

Yet, don’t be bamboozled into party mode by all of this. While markets have at least calmed down, and even though some positive economic indicators have recently emerged from Europe, the economic environment and the global financial system as a whole remain very fragile.

Global activity is directly hampered by the lack of US growth. Also, the substantial debt and volatile activity of recent years, and in the Eurozone in particular, is likely to continue to discourage investment. Chinese growth is set to continue slowing down despite a lull in capital outflows. China’s government will, of course, afford support at the monetary and fiscal level, which will limit the scale of the slowdown. But it will come at the price of additional internal imbalances.

Last but not least, while the higher oil price of around $50 gives producing countries some breathing room, they will still be required to adjust to more permanently reduced commodity revenues. In summary, there is not much growth impetus to be expected from emerging economies.

Political risks abound

In addition to other risks that lie ahead, political uncertainties are intensifying and spreading, placing yet another obstacle in the way of global growth and investors’ already shaky confidence. Over the past decades, such political risks used to have an impact mainly on emerging economies. Today, however, it is the developed economies that suffer the effects of political uncertainty. Institutional deadlock, the rise of the extremes, and the forces of fragmentation are growing across the global political landscape.

Just consider these examples: the Greek austerity referendum in 2015, the failure to form a government in Spain following last December’s elections, successive deadlocks on the budget and public debt management in the United States between 2011 and 2013, complete neglect by the Eurozone to address and to adjust its constitutional consistency, etc. The list goes on and on. Brexit may have been only the beginning.

As I write this, conservatives and nationalists all over Europe are pushing hard for their own referendum to leave the EU. And it’s not only Marie Le Pen and Geert Wilders. The people of Europe had never really been asked whether they wanted to be part of the EU and to comply with increasingly complex and invasive bureaucratic rules from Brussels. Brexit has given the voters across Europe a wake-up call.

I have to admit that as a Swiss who believes in the beauty of the Swiss (and American) constitution and the core elements of freedom embedded within, as well as the decentralization of power and true democracy that come with it, I am not opposed at all to Brexit. On the contrary, I see Brexit as an opportunity for Switzerland. Switzerland has contractual arrangements with Europe that are at times misinterpreted by Brussels, as though we were already under their centralistic yoke. We’re not. And we are finding more and more allies that see the Swiss model as a future model for the EU as well. But, I digress.

I see Brexit also as an opportunity for Europe’s politicians, and, although I have my doubts, I still hope they will finally wake up and use this opportunity to adapt and comply with the will of the people. However, as I watch the likes of Juncker and the reactions of most EU leaders, the arrogance and short-sightedness of their elitist perspectives is quite sobering, and it makes it seem unlikely that Brexit alone will suffice in changing this rigid mindset of top-down government and centralized power.

I recently came across a snippet that might well sum up the political future of Europe. It went something like this: Brexit – Nexit – Fruckoff – Spadios – Departugal – Italeave – Chechout – Oustria – Finish – Slovakout – Byegium – AdiEU!

Take note of some of the scheduled electoral events ahead:

  • Italy Oct. 16th: Referendum on the Constitution

  • United States, Nov. 8th: General elections and election of new president

  • Netherlands, Q1 of 2017: Legislative elections

  • France, Apr-May 2017: Presidential elections

  • France, June 2017: Legislative elections

  • Germany Sept. 2017: Federal elections

In my view, the impact of increased political risks on growth is considerable. It involves increased volatility in financial markets, as well as a more cautious stance of international investors. The outcome of the elections and referenda that lie ahead remain to be seen. And yet even if, against all odds, nothing changes and the established institutions and political constituencies stay in power, investors must consider the possibility of a major break in economic policy and the regulatory framework.

By nature, it is difficult for investors to establish the probabilistic scope or scale of political risk. The consequences of one change, however small, within a complex system cannot be predicted, a principle commonly referred to as the ‘butterfly effect’. Still, on a global level, investors are nevertheless encouraged to take precautionary steps, and to adjust their investment strategies and wealth allocation.

Both structurally as well as in terms of investment allocation, prudent wealth management may well demand a departure from the conventional. Clearly, you need to reduce exposure to countries most susceptible to political risk and increased financial repression.

Structurally, look for fiscally solid jurisdictions to place your assets in. Asset protection and wealth preservation need to be high up on your list of priorities. Moreover, when it comes to your investment strategy, consider increasing your exposure to investments and currencies that benefit from uncertainty, and that have proven to fare well in times of volatility. For instance, allocate part of your wealth in physical gold and silver. Consider other real assets, as opposed to paper and fiat assets purely based on government and institutional promises.

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