HONG KONG (Reuters Breakingviews) - There is plenty of discord and uncertainty as U.S. President Donald Trump’s second year starts. Yet money is cheap, the global economy is motoring, and markets are ebullient. That combustible mixture could be called “froth and frustration.” How this ironic social contrast, worthy of Jane Austen, resolves itself will be key for 2018.
Ten years after Lehman Brothers imploded, the bulls are ascendant. A single Hong Kong skyscraper recently fetched $5.2 billion and an imperfect Leonardo da Vinci sold for $450 million. With huge run-ups at tech giants such as Apple and Tencent, global stocks added roughly $13 trillion in value from in the first 11 months of 2017. Bitcoin prices shot for the heavens. Yield-chasers gorged on debut bonds from Tajikistan and the Maldives, and 100-year debt from serial defaulter Argentina.
This is not all hot air. A world recovery is gathering steam: the World Bank reckons global growth will hit 2.9 percent in 2018. The last time expansion was faster, China was splurging on bridges, roads and airports, effectively underwriting a
rebound from the financial crisis. Meanwhile, central banks have barely begun to lift interest rates or sell assets. And online behemoths such as Alibaba and Alphabet keep growing and churning out fat profits.
Investors appear to be taking the same mercenary view as one of Austen’s characters: “A large income is the best recipe for happiness.” Yet things look less reassuring close up.
The populist anger that enabled Trump and Brexit is still simmering, fuelled by inequality, disruption, immigration and the echo chambers of social media. An unpredictable America is no longer committed to advancing a rules-based, liberal world order. China is growing increasingly assertive under President Xi Jinping, while Saudi Crown Prince Mohammed bin Salman is flexing his muscles around the Gulf. The risk of a conflagration on the Korean peninsula is all too real. Business is grappling with self-inflicted scandals and activist attacks, and a backlash is building against Big Tech’s overweening power.
That is the backdrop for Predictions 2018. We have collected more than 40 in a single volume at bit.ly/BVPredicts, with dozens more available at www.breakingviews.com/2018. It is a truth universally acknowledged – to draw from Austen again – that forecasting is hard work. But it’s nonetheless a useful exercise, at the very least giving readers a way to frame the big debates ahead intellectually, and perhaps profitably.
This year, we are positive on global growth – provided Trump and Xi don’t somehow spoil the party. Midterm U.S. elections could have serious investment implications, with radical candidates edging out compromisers, as could a populist resurgence in Latin America.
The bull market need not end badly, although bitcoin could prove a total wipeout – and several other possible triggers for trouble, like blow-ups in exchange-traded funds or hedge funds, bear watching. Perhaps the biggest financial shift will be at central banks. Markets must adjust to increasingly tight policy at the U.S. Federal Reserve under new Chair Jerome Powell. And for the first time in years, rich-world bond issuance will outstrip buying by the Fed and friends. Much like the modern additions to the Austen canon in “Pride and Prejudice and Zombies,” bond vigilantes will rise from the dead.
The executive suite will see sustained pressure from many sides. Big miners will have to ape buyout shops. One of Wall Street’s titans will bow out. Passive funds will, despite their name, dethrone a chief executive. Activists could make an ugly scene in luxury. In India, the long reign of “promoter” tycoons is, mercifully, nearing its twilight. And corporate America will need to rethink attitudes to diversity and sexual harassment in the wake of recent revelations. But that should catalyse positive change, just as a spate of quality-control crises ought to force Japanese bosses to become more competitive.
In tech, investors can consider a tasty new dish: SLAW, for Spotify, Lyft, Airbnb and WeWork, four prospective candidates for public life. Europe’s electric cars will catch up with gas guzzlers in cost terms. And super-fast 5G mobile broadband, on show at the Winter Olympics and the World Cup, will demonstrate China’s hunger for technological leadership.
Among tech’s giants, Apple’s position as a privacy-sensitive hardware specialist will give it some shelter from mounting anger at Silicon Valley’s power and lack of accountability. Amazon could win friends by choosing a deserving location for its second headquarters. The sun will begin to set on U.S. tech’s feudal approach to corporate governance. But Chinese startups could push Hong Kong the other way, while it also bends over backwards to accommodate Saudi Aramco.
Not all of these prognostications will materialise. Last year, among other things, we anticipated India’s banking bailout, argued Beijing would offer Trump more carrot than stick, and correctly highlighted the difficulties Uber and Aramco faced in going public. Our biggest mistake was overestimating the pace of change in Trump’s America, which meant we braced for a stronger dollar, a flood of repatriated cash and an infrastructure bonanza.
With those caveats, we hope this will be an enjoyable and thought-provoking read.