Key takeaway – Despite declining reserves and increased interest rates, Turkey is unlikely to suffer a market-crash over the next 12 months. What happened? Since the July 2016 coup attempt, the reserves of the Central Bank of Turkey’s (CBRT) declined. Gross international reserves declined by 14 percent (by USD 14.5 bn, from USD 104.7bn to …Read More »
Articles by Alessandro Magnoli Bocchi
Key takeaway – The investment environment remains challenging. In their portfolios, investors should: i) privilege a multi-year horizon; ii) focus on capital preservation by adopting a defensive risk profile; and iii) accept lower expected returns in exchange for lower volatility. Wealth preservation requires conservative investment strategies, with a greater exposure to alternatives. The recommended strategic …Read More »
A. What happened? On June 4 2017, Saudi Arabia, the UAE, Egypt and Bahrain cut diplomatic ties with Qatar. The four Arab countries—joined a few hours later by Yemen and the Maldives—decided to: a) interrupt their diplomatic relations with Qatar; b) expel Qatar from the coalition currently fighting in Yemen; c) interrupt all transport links …Read More »
Key takeaway – Across the globe, populism and protectionism are on the rise and macro fundamentals remain weak. In this challenging context, growth will remain subdued in 2017, hampered by sluggish investment and productivity, ever-accumulating savings and modest inflation. With the exception of the Unites States (US), developed markets (DMs) will stagnate, burdened by debt and structural rigidities. In the US, if Trump’s policies veer toward pragmatism, the economy will grow above trend, lifting financial markets, especially in the first part of the year. Emerging markets (EMs) will face low growth and risks of political volatility. At the global level, geopolitical tensions, financial instability and competitive devaluations remain key risks. Fiscal and monetary policies are unlikely to strengthen demand and investment; fiscal policy might turn expansionary only in the US. Monetary policies, unable to spur growth, will steadily diverge – with a mild tightening cycle in the US and easing in the Eurozone (EZ) and Japan. While traditional banks remain under pressure, asymmetric economic performance and diverging monetary policies will increase the risk of market dislocations. Unusual times call for unusual portfolios: investors should lower their return expectations, and increase exposure to alternatives.
Key takeaway – Italy’s prospects are lacklustre, growth is stagnant. Focused on privilege preservation, the political system fosters anti-establishment feelings. Reforms are needed but – due to a reluctant electorate and a cumbersome legislative process – are difficult to implement. Cognizant of the country’s challenges, over the past three years Renzi’s government announced many important reforms, but implemented few. According to Renzi, the ineffectiveness of the legislative process is the culprit; hence, tackling institutional paralysis is the key priority. On Sunday December 4, Italy will hold a constitutional referendum to streamline lawmaking. The ‘No’ camp, an heterogeneous coalition of political forces, questions both the substance and the process of the proposed reforms and is ahead in the opinion polls. The referendum is likely to be rejected by a narrow margin. Political, economic and market concerns of a ‘no’ vote are overblown. Yes, the political process would become more uncertain, the economy would keep stagnating and market volatility would temporarily rise. But in the short term nothing will change. To enhance the long term competitiveness of its economy, Italy needs a comprehensive modernization. In other words, passing laws is a necessary, but not sufficient condition.
Key takeaway – In a surprise result, Donald Trump, the Republican candidate, won the Unites States (US) elections and will become the 45th US president. Over the next two years, the Presidency and the Congress will be in the hands of the Republican party (GOP). These outcomes are in line with global trends: first, anti-globalization sentiment and populism are on the rise. Second, most polls are proving unable to capture vote intentions. Third, financial markets fail to anticipate developments. Going forward, Trump’s policies – if fully implemented – will bring about a deterioration of the US fiscal position, weaker global trade and lower Western influence at the global level, but also lower taxes for US corporates and a lighter regulatory framework. As a result, the US economy will grow below its current trend. However, if market volatility remains low and economic data prove strong, the US Federal Reserve (Fed) is likely to hike rates in December. In the short term, most markets are likely to suffer elevated volatility. In the longer term, the market impact is likely to be negative, with entry opportunities in mispriced assets.
In a surprise result, Donald Trump, the Republican candidate, won the Unites States (US) elections and will become the 45th US president.
Key takeaway – The global economy is stagnating, financial markets are jittery and citizens disfranchised. Effective policy options are available, but – alas – most are not politically viable. Over the next 12 months, key elections will take place in the US, France and Germany and a constitutional referendum in Italy. Populist parties are unlikely to win, but – as politicians and policymakers deal with the rise of populism and the constraints of politics – governments will be too weak to pass meaningful reforms, with possibly severe consequences on economic fundamentals and market performance. The democratic process, especially in times of crisis, requires rethinking.
The global economy is stagnating, financial markets are jittery and citizens disfranchised … Over the next five years, in absence of structural reforms, global growth is likely to idle. Macro fundamentals will remain weak: high debt levels will deter investments and productivity gains, fiscal and monetary policy won’t support demand, stagnant salaries will keep real incomes flat and unemployment will constrain consumption and inflation. The world’s two largest economies – the United States (US) and the European Union (EU) – are likely to fall into recession.
Key takeaway – The Italian economy is large, relatively diversified and sturdy. Historically, growth has been driven by external factors (e.g.: the “economic miracle” after World War II) or political efforts (e.g.: competitive devaluations and fiscal spending between the 1970s and the 1990s). For decades, innovation and international competitiveness lagged most peers. After joining the Euro, the Maastricht deficit-and-debt thresholds constrained public expenditures and – as a result – growth declined below the European Union (EU) average. In 2016, growth is stagnant and prospects are lacklustre: power structures hamper meritocracy and risk taking, the investment climate is challenging, taxes are high. A crisis is looming in the banking system. Unemployment is above pre-crisis levels, and poverty and inequality on the rise. Over the next few years, the economy will be exposed to adverse shocks. Going forward, global growth will remain at best sluggish, inflation low. To avoid two lost decades, Italy should not count on external growth-drivers (it would be equivalent to waiting for Godot) but should instead proactively build internal growth-drivers via structural reforms.
The Italian economy is large, relatively diversified and sturdy.
Key takeaway – Over the next five years, mega-trends will not support an acceleration of global growth. Consumption, investment and productivity will remain sluggish, inflation low. Macro fundamentals are weak: high debt and unemployment will constrain performance. Developed markets (DMs) will stagnate and emerging markets (EMs) will struggle. Flat real incomes and rising inequality are major political risks. Instability, populism and authoritarianism will rise. Political tensions, financial instability, lower oil prices, deflation and competitive devaluations are major economic risks. Fiscal and monetary policy will not support demand and investment. The over-reliance on central banks (CBs) will continue, leading to further financial repression. Regulatory tightening will force traditional banks to choose between lower profitability and sanction risks. Liquidity-driven markets will fuel asset inflation and remain jittery. Inevitably, the rising disconnect between fundamentals and valuations will bring about a bear market, if not a crash. Unusual times call for unusual portfolios: investors should lower their return expectations, and increase exposure to alternatives.
Over the next five years, global growth will not pick up speed … Aging populations will lift savings and reduce consumption and investment.
Key takeaway – In Turkey, a coup attempt failed in less than 12 hours. President Erdoğan has declared that “the government is in control” and he is “not going to compromise”. What is next? Likely, Erdoğan’s popularity will increase, and constitutional changes will lead to a presidential system. Instability will continue, crackdowns on dissent will become the norm and further bloodshed is possible. In the short term, the international community will perceive Erdoğan as an autocrat holding chaos at bay, but in the long term it is likely to disagree on the direction – from democracy to authoritarianism – the country is taking. The Turkish economy will continue to suffer, the ongoing decline in foreign direct investment (FDI) will accelerate and the Turkish Lira (TRY) will further depreciate. Rating downgrades are possible. Market sentiment is negative (equities will suffer, bond yields rise) and oil prices are likely to increase. In the banking sector, as new loans growth will slow down and credit costs rise, profitability-enhancing reforms are now urgent. Going forward, stability is the key priority.
A. What happened?
In Turkey, an attempt of coup d’état … On June 15, 2016, a faction of the armed forces attempted to overthrow President Recep Tayyip Erdoğan.
Key takeaway – History has proven that the United Kingdom (UK) is a reluctant European: it systematically questions – but eventually integrates in – the European Union (EU). On June 23, 2016, a referendum will decide whether the UK should remain in the EU. This is not a first: in 1974, just one year after accession, the Labour party promised – as a way to win the 1975 elections – a referendum on Britain’s withdrawal (Brexit). Once in power and after having obtained significant concessions from its European partners, the Labour government campaigned for the “remain” option, winning an ample majority. In today’s Britain, all this is about to play out again. The Conservative government – after having called for an “in/out” referendum and obtained advantageous EU concessions – is now campaigning for staying in. It will get its wishes: Brexit – an untested, market-unfriendly process – looks unlikely. The economic impact would be severe: in the short term, the UK stock market could drop between 15 and 25 percent and trade volumes would shrink by 2.5 percent per year, despite an above-10 percent exchange rate depreciation. Over the long term, GDP could be 6 percent lower than otherwise. Such an impact would reduce Britain’s global influence and trade ties, and transform the UK into an isolated medium-sized economy.Read More »
Photo: Steve Passlow
Key takeaway – Over the last three decades, China’s contribution to global growth tripled. The interplay of three domestic factors enabled a growth acceleration: abundant cheap labour flocked into the industrial sector and accepted the financial repression of its savings, which in turn funded massive investment via subsidized lending to state-owned enterprises (SOEs). In other words, captive savings, channelled into captive investments, enabled an export-led strategy but – because of capital controls – created bubbles in the few asset classes available to savers. Over the last two decades, real estate investment rose by almost 300 percent; over the past 10 years, the size of the shadow banking system (SBS) multiplied by 50; between 2014 and 2015, the stock market rose by 150 percent. This model is now exhausted: current demographic trends will not deliver a labour-surplus; savings are less and less captive and less and less prone to subsidize lending to SOEs. As a result, China’s potential growth has declined, from about 10 percent to 5, and even such level could soon become an ambitious target.
Over the last three decades, China’ contribution to global growth tripled. The Communist Party of China (CPC) – the Republic’s founding-and-ruling political party – started reforming the economy in 1978.
Photo: Jeremy Vandel
Key takeaway – Turkey’s economy remains resilient, but low savings hinder growth prospects and weaken the banking sector. Turkish banks – essential for economic growth and job creation – need to raise additional capital by end-2016, but suffer from declining profitability. Meanwhile, macro risks are rising, driven by geopolitical risks, foreign exchange (FX) volatility, and a rising loan-to-deposit ratio. Micro risks are also rising: the legal framework remains inadequate (e.g.: there isn’t a personal bankruptcy law), and a high FX-debt depresses firms’ investments. In 2016, the Turkish banking sector needs profitability-enhancing reforms. If improvements are enacted, banks could attract foreign direct investment (FDI). Investors need exchange rate stability, capital protection and a clear, uniform legal environment for bankruptcies and personal guarantees.
Turkey’s economy is showing resilience … During 2016, a slowdown in exports and a decrease in tourist arrivals will weaken economic growth, nonetheless expected at 3.5 percent. Inflation will remain over 8 percent, above the Central Bank of Turkey (CBT)’s 5 percent target. The Turkish Lira (TRY) will stay under pressure, and depreciate against the US Dollar (USD) by a further 11.5 percent from current levels, to reach USD/TRY 3.242 by end-2020.
Photo: Moyan Brenn
Key takeaway – Global and local tensions are taking a toll on Turkey’s political stability. The conflict in Syria, terrorist attacks, the refugee crisis, and President Erdoğan’s divisive efforts to transfer executive powers to the presidency are breeding instability. Over the past year, the investment climate has worsened. Investors’ confidence is diminishing. The Government needs to reduce uncertainty, boost competitiveness, and attract foreign direct investment (FDI). Investors demand an enhanced business framework, a uniform enforcement of regulations and a more flexible labour market. Yet, the economy remains resilient: over the next five years, Turkey’s growth will average 3.8 percent per annum. Over the course of 2016, a slowdown in exports and a decrease in tourist arrivals will constitute a drag on economic growth. Inflation will remain over 8 percent, above the Central Bank of Turkey (CBT)’s 5 percent target. The Turkish Lira (TRY) will remain under pressure, and depreciate against the US Dollar (USD) by a further 11.5 percent from current levels, to reach USD/TRY 3.242 by end-2020.
A. Global and local tensions disrupt political stability. Despite President Recep Tayyip Erdoğan’s firm grip on power, political uncertainty and security risks remain high.
Photo: OTA Photos
Key takeaway – As predicted, the markets are down and a mild global recession is on its way. Monetary policy remains accommodative, but interest-rate divergence increases volatility. Investors face a difficult environment: most markets remain overvalued and risks are tilted to the downside. After years of complacency, financial stress is rising and market-liquidity is getting tighter. In this context, capital preservation via a defensive asset allocation is priority. Yet, unusual portfolios – less liquid and more volatile – are likely to perform better than conventional ones.
As predicted, the markets are going through a correction. As forecasted in October and November, asset prices are falling in both developed (DMs) and emerging markets (EMs). Market participants are worried about the health of the global economy and feel less protected by central bank (CB) policies. As the sharp correction enters bear-market territories, rising risk-aversion and higher volatility could broaden the contagion.
Are we in a bear market? A cyclical bear market is underway across most equity indices. The S&P Global 1200 index is down 17.9 percent from its May 2015 record-high and 10.2 percent since the beginning of the year. DM bonds are sought after, yet again.
Photo: Images Money
Key takeaway – Europe is in decline. To avoid decay, it needs to bridge the gap between aspirations and reality. As practiced, democracy is failing citizens and needs rethinking. Below-replacement fertility rates put the welfare state at risk. Rigid social structures induce risk-aversion and stifle innovation. Immigration-without-integration erodes social cohesion. Without fresh thinking at the macro and micro level, growth will stagnate. Going forward, rather than fearing German power, Europe should welcome German leadership.
Europe is in decline … The 28 member-states of the European Union (EU) are all affluent democracies, but their prospects are lackluster. Out of 508 million citizens, 20 are unemployed. Growth is sluggish, demographics unfavorable, and the debt-burden heavier than ever. Stagnant salaries and inflexible labor markets put pressure on welfare systems. Citizens do not feel represented by traditional parties and protest vote is rampant, along with anti-establishment feelings and xenophobia. Politicians and technocrats show pessimism.
… but the world cannot afford a weak Europe. In the current crises-prone environment, the stakes are high. The globe needs a thriving, cohesive Europe.
Asking the hard questions will help. To regain relevance, Europe must acknowledge that profound issues need resolving.
Photo: Nicolas Raymond
Key takeaway – The fundamental structure of the world economy is changing. While the contribution of services to global output is on the rise, investment and productivity remain stagnant, savings keep accumulating, and growth and inflation decline. Meanwhile, globalization has increased co-dependence: a rising number of countries can influence the world’s economic performance and its financial stability. Yet, the international monetary system is neither fostering an efficient allocation of global capital nor preventing currency volatility. As a result, the global economy is in the middle of a “lost decade”: emerging markets (EMs) struggle with slowing growth, a sizeable external debt, capital outflows and depreciating currencies. Europe’s economies suffer from stagnating growth, separatist politics, a heavy sovereign debt, unfavourable demographics, inflexible labor markets, a migrant crisis and religious divides. Until 2020, the price of oil will stay in the US Dollars (USD) 50-60 range. As the shortcut to recovery is an ‘unfair’ mix of orderly debt restructuring and mild inflation, monetary policy normalization will take longer than expected, buoying the financial markets. As a result, the financial system is reaching an unstable equilibrium.
Key takeaway – In a challenging global and regional context, the MENA real estate sector is showing resilience and holds strong prospects. While the global economy is characterized by weak fundamentals, below-potential growth and low inflation, the regional outlook is hampered by political instability and declining oil prices. Yet, the MENA real estate sector, despite a short-term outlook clouded by risks, is expected to perform well in the long run – supported by favourable demographics, rising per capita income and an improving mortgage market – and remain an attractive destination for investors.
In the Middle East and North Africa region (MENA), growth is expected to remain flat at 2.2 percent in 2015 and in 2016. Sluggish growth prospects are due to: a) prolonged political instability and ongoing conflicts in Syria, Iraq, Libya and Yemen; b) declining oil prices, which have reduced revenues and growth in oil exporting countries; and c) a chronically slow pace of reforms, which persistently hinder investment.
However, the growth potential of MENA’s real estate sector remains strong. Across a surface of over 15 million km2, demand is supported by favourable demographics, rising per capita income and an improving mortgage market. MENA hosts about 6 percent of the world’s population, about the same as the European Union (EU).