By Gervais Williams, Miton
Gervais Williams, Fund Manager and author of 'The Retreat of Globalisation'
The reduction of trade barriers has raised many millions out of poverty. And the globalisation of trade is estimated to have added an extra 45% to the world growth since 1990. During this period many companies have enjoyed strong trading conditions, and buoyant cashflow that has funded good wage growth, a rising tax take, and growing dividends (the amount that a company pays to shareholders) that has increased the value of our collective savings and pensions.
But since 2008 the pattern has changed. Despite ultra-low interest rates, and rising market valuations, many companies have pulled back on their ongoing investment in the future. Lower levels of capital expenditure are now coming through with productivity stagnating.
As tax takes slow, governments are finding it harder than expected to close their budget deficits. Even the new jobs being created are now more temporary in nature as companies are less certain about the future.
These changes are now leading many to question the wisdom of globalisation. Social attitudes rarely change. But when they do, they can change more abruptly, and more radically than most assume. This is underlined by the recent results of the UK’s Referendum on the EU and the election of Donald Trump.
Going forward, the changing political climate is prompting the first significant change in economic policy for three decades. In the past free trade agreements were seen as vote winners, but now they’re becoming politically toxic. We are entering a major economic turning point. The Retreat of Globalisation seeks to look forward to identify some of the potential changes that could lie ahead. In future, the market winners and losers could look very different.
For example, the Chinese economy was one of the big winners of globalisation, particularly over the last fifteen years. It hasn’t happened by accident. They have had to work at it. For example, after the Global Financial Crisis, the Chinese economy was vulnerable to a sharp slowdown in world demand for its goods, and a potential setback with regard to their long term goal of generating additional employment.
So, in 2009 the Government embarked on a giant period of investment in Chinese infrastructure. Many will have read about the new cities, transport links and power stations that have been built over recent years. These boosted Chinese growth, and helped the world economy to recover after the Global Financial Crisis.
But they have also involved a huge amount of funding. The problem is that the sheer scale of infrastructure investment simply overwhelmed the needs of the Chinese economy, in spite of its ongoing growth. Whilst some of the investment did initially address bottlenecks in their economy, progressively much of the investment was directed at more marginal projects and a significant amount that has almost no real economic value whatsoever. This is now causing problems. Much of the infrastructure spend is failing to generate sufficient cashflow to fund interest payments.
During 2016 the Chinese authorities have let their banks free-wheel, rolling over interest payments in additional debt. There’s been a surge in accounts receivable, and other IOU’s, with a cashflow shortage becoming more pressing, and the consequential losses more obvious. Some are seeking to address their problems with a series of price rises, which is now coming through with inflation and higher export prices of Chinese goods.
A few years ago it was unthinkable that the Chinese economy might become so difficult, but now it might be facing a period of stagflation. All this underlines the scale of change facing markets. The Retreat of Globalisation identifies some of the strategies that fund managers can utilise to safely steer their clients through the next few years. Expect more economic and market change in the next three years than we have had in the previous three decades.
The reduction of trade barriers is estimated to have added an extra 45% to the growth of world GDP since 1990. – Macrostrategy – Julien Garran During the year there has been a surge in accounts receivable, and other IOU’s, but the cashflow shortage is becoming ever larger, and it’s getting harder to hide the losses. China treadmill to deflation 12th Oct Andrew Lees, Macrostrategy. This can be viewed as closing the safety valve on the inflationary pressures within their economy. It is quite possible that the Chinese economy could face a period of stagflation during 2017. Andrew Hunt Economics Global Weekly Review 16th December 2016. IMF – Global Trade Liberalisation and the Developing Countries, 2001. The Economist – China’s financial system: The coming debt bust, 7th May 2016. FT - China debt load reaches record high as risk to economy mounts, 24th April 2016. FT - China escapes deflation but are rising global prices on the way?, 14th October 2016.