Three mega trends to define the decade, 11 May 2023
Part of the Sapienta Cyprus Reflections series
Image credit: EXANTE Horizon.
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In late April I spoke on a panel at the EXANTE Horizon event in Limassol. Panelists discussed both short- and long-term trends that will affect markets this year and beyond. I argued that there are three megatrends that will affect the global economy and therefore all asset classes in the coming decade. The three trends are:
Inflation: why it is here to stay.
Green transition: why it won’t go away.
ChatGPT/ai: nirvana or doomsday?
Inflation: why it is here to stay
1. Resilience is prioritized over efficiency. Although inflation rates have been falling in recent weeks, I believe it highly unlikely that we will see a return to the low rates that marked much of the first two decades of this century. Why? Primarily because of geopolitics. If you consider that 9/11 defined how the West engaged with the world for the first two decades of this century, the war in Ukraine will define the next two. It came on top of a global health pandemic and reinforced major fears about China. The major change is that the US and the EU have now taken a strategic decision to prioritize resilience over efficiency.
What does that mean in practice? First, it means that “just in time” production is gone. You need back-ups, spare capacity, extra supplies, warehouses, spare electricity capacity. All of these cost money, which will be passed onto consumers. We saw an extreme version of this with natural gas prices last year.
2. Onshoring is back. A second reason is that the US has decided that it does not want to depend on China for technology. I assume that this is because it expects China to make a move on Taiwan in the coming years and the US does not want an EU-style energy crisis when it slaps sanctions on China for making that move. Meanwhile, the EU has already decided that it does not want to depend on Russia for energy. There will therefore be greater “friendshoring” (moving production to friendly countries) and “onshoring” (moving production back home). Friendshoring runs its own risks, given that many of these friends also depend on China for supplies. Therefore, for some critical goods and services, there will be a trend towards onshoring. Workers in the US and the EU have rights to pensions, healthcare, days off and so on. Onshoring therefore means more expensive workers (until artificial intelligence takes over: see below). More expensive workers means more expensive goods and services, means higher inflation rates than in the past. We might not have double-digit inflation as we saw last year. But we are not going to have 0-1% or even 2% inflation either.
Green transition: every lending decision will be affected
1. Insurers will demand it. Regardless of who is in power the green transition is here to stay for a number of reasons. First, because insurers do not want to cough up billions for companies and organizations that have not made efforts to mitigate climate risks. Insurance will be a far more important consideration than the risk of being sued by, say, Florida, for including environmentally sound bonds in your pension plans.
2. Non-green will be expensive. A second major reason is what is happening at the regulatory level. The European Central Bank (ECB) has started to examine the carbon footprint of its portfolio. It is therefore inching towards a policy in which it will not buy your corporate or sovereign bonds, or will haircut (discount) them far more heavily, if you cannot demonstrate that they are green. Banks get liquidity from the ECB by putting up their loans as collateral. This means that the ECB’s policy will trickle all the way down to lenders’ decisions. In Cyprus bankers will be asking things like, how was the cement for this building made: with green energy or with high-emission mazut burned by the Electricity Authority of Cyprus (EAC)? Where are the electric charging stations for your building? How is your building preserving water use? For service companies, banks might ask: does your coffee delivery company use e-bikes or fossil-driven motor cycles? How much printing does your advertising company use? For households, it will affect whether consumers can get a loan for a car.
3. The US will be affected too. As noted above, there are efforts by a number of states in the US and members of Congress to try and prevent this trend. But as ING noted the other week, the US cannot escape.
“Those who think that Europe’s far-reaching ESG regulations will only impact European companies alone should think again. The clearest example is the Corporate Sustainability Reporting Directive, which subjects third-country companies with securities listed on EU-regulated markets to similar disclosure challenges as their European counterparts over a similar timeframe.”
Artificial intelligence: the next great disrupter
Volatile assets. Here I admit I am not an expert. But I assume the ai revolution will lead to more volatility in stock markets and other open exchanges, because asset selection by artificial intelligence (ai) will be like algorithmic trading on steroids.
Social and political instability. Another key worry is all those countries in Asia who depend on their populations going abroad to do manual labour and send remittances back home: like domestic workers or ship workers from the Philippines. What happens to social stability—and therefore the country’s political allegiances—when these workers are replaced by robots and the country’s income dries up?
More frequent social surveys. Closer to home, how will ai disruption start spilling into our own lives? I do not have the answers. All I would say is that we need to keep a very keen eye on the social impact. This means some basic changes to how statistics are gathered. For example, the Household Budget Survey in Cyprus is done only every five years. If you want to see the real live impact of rapid changes in a society, you need to do it quarterly or even monthly.