Geopolitics and investing

The world may appear fraught with geopolitical risk, but such perceptions cloud the vision of many investors who ignore the rich potential thrown up by the seeming disorder.

Speaking to retirement fund trustees and investment professionals at the Sanlam Investments Institutional Insights conference in Johannesburg last month, former White House adviser Philippa Malmgren, at present consulting to the British government, said a focus on quantitative analysis blinded asset managers to technological innovation taking place in the “real” global economy.  “The noise makes us miss investment opportunities. Don’t be blinded; geopolitics doesn’t increase investment risk. Money always follows the path of least resistance… don’t bet against it.”

Malmgren said that the “maths and data lens” had distorted the ability of asset managers to detect ripe pickings right under their noses.

“You have to open both eyes. Not everything is reflected in the data. A lack of imagination led to people missing Brexit, missing Trump, and missing the slowdown in China — and what China has done to export its sources of GDP. You cannot quantify and build models for everything — that way you wilfully become ignorant of what’s possible.”

Malmgren said she was unashamedly bullish on global markets. “It sounds crazy, but $18-trillion in post-crisis spending and inflation has got to go somewhere. There has been a fundamental shift to innovation, and that needs more money”.

Two fundamental forces were driving the geopolitical landscape at the moment, she said. Firstly, US President Donald Trump’s explicit intentions to reduce the size of his central government and to devolve increased powers to the state level. This meant a steadily shrinking US interest in affairs outside the US. This in turn has allowed Russia and China to steadily encroach outside their borders. In effect it has dramatically transformed the global economy, permitting savvy investors to find rich new sources of opportunity — if they look beyond the fear factor. As fiduciaries, we need to open both eyes and not just look at the data to manage the future or we might just miss some of the greatest investment opportunities in the world”.

China is investing in the US backyard?

The second major force in geopolitics is being shaped by what Malmgren stresses are almost hidden inflationary effects — a “silent wrecking ball”, as she terms it. China’s rapid growth, for instance, has made many of its formerly cheap industries (and labour) expensive in a global context. It has led China to relocate much of its manufacturing offshore, as far afield as Portugal, the UK, Mexico and east Africa. Again, opening up fresh opportunities for investors as the international flow of money shifts out of the Asian mainland in search of new markets.

Central to this expansionist push is China’s grand “One belt, one road” mission to create road and rail infrastructure linking it to Europe, and heavy investment in port facilities elsewhere in the developing world. Says Malmgren, this is China’s way of getting back at the US for letting inflation drift upwards.

The US, too, was undergoing radical change, said Malmgren. The east and west coasts, for so long the engine of the US economy, were ceding power to regions such as Texas and other states in the south — close to what Malmgren calls the “most dynamic and competitive emerging market”, which is Mexico. “Trump’s wall is just a distraction that makes many people overlook the potential there,” she said.

The more “scary and disturbing” trend, she cautioned, was the formidable rise in people’s cost of living and debt burdens. On the one hand this has led to protests as people realise that politicians’ promises have not been met. Yet the other outcome has been a relentless push into innovation, in individual enterprises that Malmgren says are mushrooming “on an epic scale”.

In answer to the inevitable questions about North Korea, Malmgren said it was an issue that should not be relevant to anyone’s investment portfolio. This was because Trump has in effect given China permission to “soft annex” the territory. While he may rattle nuclear sabres, the US president has made it clear he has little interest in “fixing” North Korea.

The more subtle issue in North Korea, said Malmgren, was that China’s real concern was with maintaining strong borders. So too with South Korea. The last thing either country wanted was floods of “feudal vassals of a Stalinist state” overwhelming China and South Korea and causing a humanitarian and economic crisis. “Their fear is not war, but of containing refugees,” she said.  North Koreans don’t understand the concept of ‘work to get pay’; its work to stay alive’.

How do we navigate the dual world of politics and economics?

“We assume the worst when it comes to geopolitics, but we need to put things in perspective. The North Korea standoff does not affect markets or increase investment risk. People don’t realise that politics doesn’t define the outcome — it’s the profit motive and innovation that does. Money is a lot like water: it always flows to points of least resistance, where taxes and red tape are less of a hindrance.” Moreover, the rise of geopolitical risk fuelled by the nuclear stand-off between the US and North Korea, is causing a demand for safe-haven assets, such as gold and other precious metals.

For this reason, Nigeria was quickly becoming the recipient of “mind-boggling” inflows of both money and intellectual capital, particularly in the field of coding. “As people are freed from manual labour, we will see exponential growth in formerly underdeveloped economies,” said Malmgren. This growth will be driven by the chase for computing power, what she terms “the new arms race”. And key to this will be the race for the first quantum-scale blockchain (cryptocurrency platform) — the processing architecture made popular by Bitcoin — which will be key to the ability of governments to most efficiently move information and money around the world. The blockchain is an undeniably ingenious invention and the world’s most popular digital wallet.

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