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The road ahead: How will geopolitics shape investment management in 2019?

Geopolitics will often dominate the agenda for investment managers. So, what will be the geopolitical trends and events set to have an influence in investment management in 2019?

Brexit Day

Firstly, there is no escaping the B word in 2019, as the UK prepares to leave the European Union (EU), potentially with no withdrawal deal agreed between itself and the other members of the continent and the future relationship between the two up in the air.

March 29 2019, ‘Brexit Day’, the day in which the UK must formally withdraw from the EU, will be an important date in the economic calendar as those involved prepare for the outcome or fallout as the UK ‘officially’ leaves the union.

Will China Trump the US?

Even before Brexit, the US  president will aim to not be trumped in the face of an ongoing trade dispute with China. US president Trump and president of the People’s Republic of China, Xi Jinping, apparently agreed a trade ‘truce’ at the G20 summit in Buenos Aires late last year.

Following dinner discussions between the two world leaders, Trump agreed to delay his levy of 25% on most of imports from China: it was agreed that no tariffs would be imposed on China over the new year period.

However, March 1 marks the end of the extension for the US to increase tariffs on Chinese imports at a rate of 25%. Negotiations are still active between the two parties; however, it does not seem, at the time of writing, that any solid deal or truce has been formally agreed. Much like Brexit, this is up in the air, with consequences looming for the global investment management community.

"As certain events reverberate globally, asset managers and other members of the investment community will most likely be analysing how they will feel – and minimize - the impacts of them".

To put this dispute into context, Linda Yueh notes that, “when nations trade, prices of traded goods will converge, and so would the wages of those producing those products. That means that wages in America will decline and move towards those of its trading partner, say China, over time in the traded sectors”. If we extrapolate this comment and marry it with the assumption that US policy is currently largely directed by a protectionist federal government under Trump, it is difficult to see any end to the trade debate.

The right time to enter the China market?

China’s economic growth slowed towards the end of last year to 6.5pc, which was the slowest growth since the financial crisis and only modest growth is expected next year, according to the country; deaccelerating economic growth according to others, as Xiping aims to continue support for infrastructure, jobs and promote reform.

"...Some even believe that we may see a global financial crisis and subsequent recession this year. Global debt hit a high in 2018; global debt has increased twofold in just 15 years and it now stands at over three times the amount of global GDP. This, combined with other geopolitical issues, has led to some predict a crash in 2019."

China has opened opportunity in the market with sweeping policy changes and the investment management market has the potential to grow to $17 trillion by 2030. However, how those in the industry will approach entering is still a tricky business.

Global sluggishness: How will the world economy fare?

In the context of global economic growth, the International Monetary Fund (IMF), in its World Economic Outlook for 2019 lowered its forecast for global economic growth this year due to rising protectionism related to trade and unstable emerging markets. The forecast includes the US (which has already raised federal interest rates due to market instability and slowed-down global growth), China, Japan and the Eurozone as well as many emerging markets.

According to Isabelle Mateos y Lago, Chief Multi-Asset Strategist at BlackRock, “the effect of geopolitical shocks on global markets is often short-lived”. However, she continues that, “the global impact has been more acute and long-lasting when the economic backdrop was weak. As global growth slows in 2019, we see markets becoming more sensitive to geopolitical risks as a result”.

A new financial crisis and recession?

Moving further beyond slowing economic growth, some even believe that we may see a global financial crisis and subsequent recession this year.

Global debt hit a high in 2018; global debt has increased twofold in just 15 years and it now stands at over three times the amount of global GDP. This, combined with other geopolitical issues, has led to some predict a crash in 2019.

Democratic elections; the rise of populism and the far-right

Adding to these two behemoth geopolitical narratives and the issue of global economic growth, the rise of political populist parties in European countries such as Italy and far-right nationalist parties such as in France and over 2 billion people voting in national elections this year are sure to have a profound effect on the global economy.

As certain events reverberate globally, asset managers and other members of the investment community will most likely be analysing how they will feel – and minimize - the impacts of them.

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