Tim Wishart: Investors have much to ponder as ‘turbulent twenties’ hit economies

Of course, this view had nothing to do with some prophetic forecast of the Covid pandemic and global governments’ handling of the medical crisis that has enveloped the world in the opening innings of this decade, but was instead built around a view the world was likely to suffer from a continuation of geopolitical, political and social-economic shifts that were rupturing the relatively stable period the world had enjoyed since the end of the Second World War.

If anything, beneath the obscuring fog generated by the Covid crisis, the first 18 months of this decade have hardened this view.

Undoubtedly, the biggest subject to focus on for us as global citizens is how the world’s two superpowers, the US and China, can work together to avoid falling into the Thucydides Trap, where conflict arises when two rival hegemons jostle over the sharing and eventual transfer of power from one to the other.

This might well be a slow-moving transition and take decades to resolve, but events have accelerated in the last few years, and our sense is that China is emboldened by the lacklustre efforts of the Biden administration, whose foreign policy efforts have been very questionable.

In particular, the recent scenes in Afghanistan and the further retreat of the US from its post-1945 role as global “policeman” may encourage a view in Beijing that now is an opportune time to strengthen its creeping sphere of influence across their region and through Eurasia, as well as strengthening its ambitions in the South China Sea. We have been of the view that China’s claims over Taiwan would likely remain unresolved

and that a military conflict was unlikely (unless triggered by a mistake or an overreach) but the probable indirect impact of the chaotic, and sadly predictable, scenes in Afghanistan is that China will feel much more powerful after the US’s miserable retreat. That this is happening when Xi Jinping is about to secure his third term as “Emperor” of China creates further uncertainty and is something we will monitor closely.

If one indirect result of events in Afghanistan is an increasingly ambitious China, another is a possible further negative lurch in US politics. Just as commentators and investors were sensing the Democrats and Republicans could be trusted to work together, in part, on major policy initiatives – such as the messy infrastructure bill currently progressing in Washington – those hopes may well have been dashed upon the rocky mountains of Afghanistan. It is likely the Republicans will sense weakness in the Democrats as a chance to gain momentum going into next year’s mid-term elections, where we could see control of the chambers of power in the US swing away from the Democrats.

The uproar around events in Kabul, as well as a growing unease around under-reported rises in consumer prices, could be heavy weights for Democratic candidates to bear into their individual elections in November 2022. Elections are often determined by which political base is angrier, and all confidence and sentiment surveys hint the Republicans will have a surge in their voter base as we move into next year’s elections.

An election that could have an understated importance before next year’s US midterms is the one in Germany next month. The latest polls give a clear indication the election will not be clear-cut and will result in discussions over who can form a workable coalition, determined eventually by who is willing to cede their political positioning on various matters in order to govern.

Whatever happens, there will be change for

the first time since 2005, as Angela Merkel has already decided her race as chancellor is run. Irrespective of what one may think of Mrs Merkel’s policies and philosophies from the last 16 years, the inescapable fact is she has been a steadying influence in the turbulent waters of European politics.

What happens next will be interesting, with regards to Germany’s commitment to a “balanced budget”, its commitment to the European project and, most importantly for investors, financially bailing out their neighbours, as they have tacitly done for the last decade. Any new policies and turns could bring fresh opportunities for investors.

At least for now, European financial markets and investors have been anaesthetised by the miracle drugs applied by the European Central Bank, which, through its exhaustive money printing, has created an air of total complacency around the structural political, economic and demographic risks that exist across the Channel; but these could rear their ugly heads once again in a less certain political environment ahead.

Tim Wishart is head of Scotland and the north

of England at Punter Southall