Multipolarity And Globalization: Incompatible...

October 2013

Multipolarity And Globalization: Incompatible Pairing

February 2015

Presentation to: The 2nd Annual Texas Investors Summit - Houston

Marko Papic Chief Strategist Geopolitical Strategy

2

A Word On Methodology For (geo)political analysis to be investment-relevant, it has to…

1. Examine policymaker CONSTRAINTS, not their PREFERENCES

2. Maintain risk-neutrality 3. Reveal endogenous (geo)political assumptions, not

fixate on exogenous ‘tail risks,’ or as Mark Twain said:

“It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.”

Forecasts For 2015

• Keystone theme: Multipolarity continues

• East Asia: Tensions temporarily subside • Middle East: Iran-Saudi proxy war in Iraq • Russia: Cold War Lite subsides and simmers

• EM: Bloodbath • DM: U.S. political risks overstated, in Europe

understated (but not existential)

3

Hegemonic Stability Has Underpinned Globalization

© BCA Research 2015

4

22

18

14

10

75 80 85 90 95 2000 05 10 15

100

80

60

40

GLOBAL EXPORTS* (AS A PERCENTAGE OF GLOBAL GDP) (LS) POPULATION LIVING IN CAPITALISM** (AS A PERCENTAGE OF GLOBAL TOTAL POPULATION) (RS)

% %

* BASED ON IMF DATA, SHOWN SMOOTHED. ** PERCENTAGE OF GLOBAL POPULATION LIVING IN COUNTRIES WITH FRASER INSTITUTE ECONOMIC FREEDOM INDEX EQUAL TO OR GREATER THAN FIVE. BASED ON FRASER INSTITUTE AND WORLD BANK DATA.

Pax Americana

Hegemonic Stability Evolving Into Multipolarity

5

© BCA Research 2015 © BCA Research 2015

1.2

1.1

1.0

.9

90 94 98 02 06 10

1.2

1.1

1.0

.9

GEOPOLITICAL POWER INDEX* U.S. RELATIVE TO RUSSIA AND CHINA

* THE GEOPOLITICAL POWER INDEX MEASURES A COUNTRY'S POWER BASED ON A WEIGHTED AGGREGATION OF ITS ECONOMIC, MILITARY, POLITICAL, TECHNOLOGICAL, AND GEOGRAPHICAL ENDOWMENTS. SOURCE: BCA CALCULATIONS.

80

70

60

50

40

30

20

50 60 70 80 90 2000 10

80

70

60

50

40

30

20

U.S. ROLE IN WORLD AFFAIRS: ACTIVE ROLE STAY OUT

% %

RESPONDENTS WERE ASKED THE QUESTION,"DO YOU THINK IT WILL BE BEST FOR THE FUTURE OF THE COUNTRY IF WE TAKE AN ACTIVE PART IN WORLD AFFAIRS OR IF WE STAY OUT OF WORLD AFFAIRS?". SOURCE: CHICAGO COUNCIL SURVEY 2014.

Multipolarity Is Messy And Dangerous

40

35

30

25

20

15

10

5

1820 1840 1860 1880 1900 1920 1940 1960 1980 2000 2020

40

35

30

25

20

15

10

5

NATIONAL CAPABILITY INDEX: U.S. U.K. FRANCE

GERMANY CHINA JAPAN RUSSIA

% %

SOURCE: CORRELATES OF WAR DATABASE BY SINGER, BREMER, AND STUCKEY. THE NATIONAL CAPABILITY INDEX MEASURES THE MATERIAL CAPABILITY OF COUNTRIES IN THE FORM OF IRON AND STEEL PRODUCTION, MILITARY EXPENDITURES AND PERSONNEL, PRIMARY ENERGY CONSUMPTION, AND TOTAL AND URBAN POPULATION.

WWI

WWII


6

Multipolarity Will Erode Globalization


7

.20

.18

.16

.14

.12

.10

.08

.06

1840 1860 1880 1900 1920 1940 1960 1980 2000

.20

.18

.16

.14

.12

.10

.08

.06

TRADE GLOBALIZATION*

* TRADE GLOBALIZATION IS MEASURED BY IMPORTS AS PERCENTAGE OF GDP FOR 148 COUNTRIES WEIGHTED BY POPULATION. SOURCE:CHASE-DUNN C, KAWANO Y, AND BREWER B, "TRADE GLOBALIZATION SINCE 1975: WAVES OF INTEGRATION IN THE WORLD SYSTEM," AMERICAN SOCIOLOGICAL REVIEW 65 1, 2000.

Pax Americana

Pax Britannica

Hegemonic Instability

Investment Conclusions

• (Geo)political risks will increase in frequency – search for safe-haven assets continues

• Competition for commodities between competing regional powers will intensify

• EM needs access to foreign capital inflows and foreign markets for sustained growth • DECADE THEME: DM over EM

• Global savings glut will be assuaged • Inflation may not be dead

8

9

East Asia Tensions Are On A Secular Rise

.75

.70

.65

.60

.55

.50

.45

.40

90 94 98 02 06 10

.75

.70

.65

.60

.55

.50

.45

.40

GEOPOLITICAL POWER INDEX CHINA U.S.

NOTE: THE GEOPOLITICAL POWER INDEX MEASURES A COUNTRY'S POWER BASED ON A WEIGHTED AGGREGATION OF ITS ECONOMIC, MILITARY, POLITICAL, TECHNOLOGICAL, AND GEOGRAPHICAL ENDOWMENTS. SOURCE: BCA CALCULATIONS.

33% increase in two decades


170

150

130

110

90

70

50

30

90 94 98 02 06 10 14

170

150

130

110

90

70

50

30

MILITARY EXPENDITURE*: CHINA JAPAN

* SHOWN IN CONSTANT 2011 U.S. DOLLARS. SOURCE: STOCKHOLM INTERNATIONAL PEACE RESEARCH INSTITUTE.

Bn USD

Bn USD


China: Armed And Friendless

80 WHICH COUNTRY IS THE GREATEST ALLY?

%

NOTE: THE NUMBER OF RESPONDENTS WHO ANSWERED U.S. OR CHINA TO THE QUESTION, “WHAT COUNTRIES CAN YOUR COUNTRY MOST RELY ON AS DEPENDABLE ALLIES IN THE FUTURE?” SOURCE: PEW RESEARCH CENTER, JULY 2014, “GLOBAL OPPOSITION TO U.S. SURVEILLANCE AND DRONES, BUT LIMITED HARM TO AMERICA’S IMAGE.”


70

60

50

40

30

20

10

U.S. CHINA

PHIL

IPPI

NES

SOU

TH K

OR

EA

JAPA

N

IND

IA

VIET

NAM

THAI

LAN

D

IND

ON

ESIA

MAL

AYSI

A

SOURCE: DIMITRAKI AND LIU, “THE MILITARY EXPENDITURE-ECONOMIC GROWTH NEXUS: EVIDENCE FROM CHINA, 1950-2011,” BRUNEL UNIVERSITY, MARCH 2011, AND SIPRI.

4.5

% Of GDP

4.0

3.5

3.0

2.5

2.0

1.5

1.0

0.5

1970

s

1980

s

1990

s

2000

s

2010

s


CHINESE DEFENSE SPENDING BY DECADE

10

History Is Not Reassuring

11


300

250

200

150

100

1875 1885 1895 1905

300

250

200

150

100

GDP* GERMANY U.K. FRANCE

* IN 1990 INTERNATIONAL GEARY-KHAMIS DOLLAR; SOURCE: ANGUS MADDISON, REBASED TO 1870=100.

Europe in the 19th century…

…Rhymes with Asia in the 21st century

350

300

250

200

150

100

96 2000 04 08 12

350

300

250

200

150

100

GDP* CHINA JAPAN KOREA

* AT PURCHASING POWER PARITY, IN REAL TERMS; SOURCE: IMF; REBASED TO 1995=100.


Middle East: Second Derivative Of Multipolarity

12

Middle East: Why Iraq Matters

CONTRIBUTION TO EXPECTED OIL SUPPLY INCREASE

(2012-2020)

%

60

50

40

30

20


IRAQ

U.S

.

BR

AZIL

CAN

AD

A

KAZ

AK

HST

AN

OTH

ER N

ON

-OPE

C

CH

INA

LIB

YA

VEN

EZU

ELA

SOURCE: WORLD ENERGY OUTLOOK 2013, INTERNATIONAL ENERGY AGENCY.

12000

10000

8000

6000

4000

2000

Higher than during the anti-U.S. insurgency

2008

2009

2010

2012

2013

2011

2014


13

CIVILIAN DEATHS IN IRAQ 2008-2014

Oil Price Collapse: Is There A Clear Demand Driver?


14

10

8

6

4

2

0

-2

-4

-6

1982 1990 1998 2006 2014

10

8

6

4

2

0

-2

-4

-6

GLOBAL INDUSTRIAL PRODUCTION Ann%

Chg Ann% Chg

Less clear demand catalyst

?

Is today like 85/86?

140

120

100

80

60

40

20

140

120

100

80

60

40

20

WTI OIL PRICES 2002-CURRENT 1973 - 1990*

USD/ Bbl

* OIL PEAK IN NOVEMBER 22, 1985 IS REBASED TO THE JUNE 20, 2014 PEAK LEVEL.

USD/ Bbl

…then prices should have bottomed already

If today’s price collapse is like 1985/86…

?

Russia-West Tensions Will Simmer, Not Blow Up

NATURAL GAS IMPORTS AND EXPORTS (2012)

EU IMPORTS FROM RUSSIA AS PERCENTAGE OF EU CONSUMPTION RUSSIAN EXPORTS

TO EU AS PERCENTAGE OF TOTAL RUSSIAN EXPORTS

%

80

70

60

50

30

%

60

50

40

30

20

10

EU

EM E

XCLU

DIN

G C

HIN

A

EUR

OPE

EXC

LUD

ING

EU

CH

INA

U.S

.

RUSSIAN OIL EXPORTS* AS A PERCENTAGE OF TOTAL OIL EXPORTS (2013)

40


15

* SOURCE: UNCTAD. SOURCE: BRITISH PETROLEUM.

Why Not Buy Russia On De-Escalation?

16


12.5

10.0

7.5

5.0

02 04 06 08 10 12 14

12.5

10.0

7.5

5.0

RUSSIA: 12-MONTH FORWARD P/E RATIO*

20

0

-20

-40

-60

02 04 06 08 10 12 14

-.1

-.2

-.3

-.4

-.5

RUSSIA: COMPARATIVE VALUATION INDICATOR* (LS) CORPORATE GOVERNANCE INDICATOR** (RS)

%

* PERCENTAGE PREMIUM / DISCOUNT RELATIVE TO EM BENCHMARK. ** SHOWN ADVANCED; SOURCE: WORLD BANK.

* SOURCE: THOMSON/IBES.

17

EM: Bloodbath – Structural Reforms Are Needed


5

4

3

2

2000 02 04 06 08 10 12 14

5

4

3

2

EMERGING MARKETS*: PRODUCTIVITY**

Ann% Chg

* MARKET CAP-WEIGHTED AGGREGATE OF 21 EM ECONOMIES. ** SOURCE: THE CONFERENCE BOARD, TOTAL ECONOMY DATABASE

Ann% Chg

Structural rise in productivity

Structural decline in productivity

* INCLUDES CHINA, BRAZIL, RUSSIA, INDIA, MEXICO, INDONESIA, TURKEY, MALAYSIA, THE PHILIPPINES, THAILAND, AND SOUTH AFRICA. ** SOURCE: WORLD BANK AND BCA RESEARCH. *** WEIGHTED BY POPULATION.

BCA GOVERNANCE INDICATOR** (LS) GDP PER CAPITA*** (RS)

EMERGING MARKETS*:

© BCA Research 2015 -.44

-.40

-.36

-.32

-.28

02 04 06 08 10 12 14

5000

4000

3000

2000

USD

18

Growth Is Not Correlated With Equity Returns

1993-19981998-20032003-20082008-2013


19

EM* AVERAGE GDP GROWTH

No correlation!

EQU

ITY

PRIC

ES: E

M* R

ELAT

IVE

TO W

OR

LD

14

9

4

SOURCE: MSCI INC. (SEE COPYRIGHT DECLARATION) AND IMF WORLD ECONOMIC OUTLOOK. * NOTE: DATAPOINTS REPRESENT CHINA, BRAZIL, INDIA, RUSSIA, SOUTH AFRICA, SOUTH KOREA, TAIWAN, MALAYSIA, CHILE, MEXICO, AND SINGAPORE DURING FOUR SEPARATE TIME PERIODS.

-10 0 10 20 30 40

1993-1998 1998-2003 2003-2008 2008-2013

Gauging Risk Of Social Unrest


19 * INEQUALITY IS MEASURED BY GPD PER CAPITA AS A MULTIPLE OF MEDIAN WEALTH. SOURCE: IMF WEO OCTOBER 2014 AND CREDIT SUISSE GLOBAL WEALTH DATA BOOK. ** INDICATOR IS AN EQUALLY-WEIGHTED AVERAGE OF THE FOLLOWING MEASURES: GOVERNMENT EFFECTIVENESS, VOICE AND ACCOUNTABILITY, RULE OF LAW, AND CONTROL OF CORRUPTION. SOURCE: WORLD BANK AND BCA RESEARCH.

-0.5 0 0.5 1

1.5

1

0.5

INEQ

UAL

ITY*

GOVERNANCE INDICATOR**

HUNGARY

CZECH REPUBLIC

POLAND CHILE

MALAYSIA

CHINA PERU MEXICO

COLOMBIA INDONESIA

PHILIPPINES

INDIA

3

2.5

2 SOUTH AFRICA

TURKEY BRAZIL

RUSSIA THAILAND

Unequal & poorly run Social unrest risk

Equal but poorly run Equal & well run

…But The Economy Is Actually Worse Off Than In 2011


12

11

10

9

10 12 14

12

11

10

9

EURO AREA: UNEMPLOYMENT RATE

% %

2

0

-2

-4

10 12 14

2

0

-2

-4

EURO AREA: REAL GDP

Ann% Chg

Ann% Chg

20

European Risks Appear To Be Under Control…

21


80

60

40

20

2013 2014

80

60

40

20

PERCENT OF VOTING INTENTIONS: SPANISH* CENTRIST PARTIES PODEMOS (SPAIN) ITALIAN** CENTRIST PARTIES 5S MOVEMENT (ITALY)

% %

* INCLUDES THE PEOPLE'S PARTY, SOCIALIST WORKER'S PARTY, AND THE UNION, PROGRESS AND DEMOCRACY. ** INCLUDES THE PARTIES IN THE CENTRODESTRA COALITION AND THE CENTROSINISTRA COALITION. ALL SERIES ARE AGGREGATED FROM VARIOUS POLLING DATA.


90

80

70

60

50

02 04 06 08 10 12 14

90

80

70

60

50

PERCENT OF RESPONDENTS IN FAVOR OF THE EURO:

GREECE SPAIN FRANCE ITALY GERMANY EURO AREA AVERAGE

% %

SOURCE: EU COMMISSION. 2015

JAN APR JUL OCT JAN APR JUL OCT JAN

Europe: Populist Appeal Has Plateaued

12

10

8

6

1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

12

10

8

6

EURO AREA*: NON-CENTRIST PARTIES IN PARLIAMENT

% %

* INCLUDES AUSTRIA, BELGIUM, FINLAND, FRANCE, GERMANY, GREECE, ITALY, THE NETHERLANDS, PORTUGAL, AND SPAIN.


Support rises…

…and then peaks

Great Recession

22

U.S.: Polarization In Context

23

-1 -0.8 -0.6 -0.4 -0.2 0 0.2 0.4 0.6 0.8 1

More liberal

SOURCE: POOLE, ROSENTHAL, ET AL. (2014) AND BCA CALCULATIONS.

More conservative

House Democrats (1985-1987)

Clinton (1995-1997)

Obama (2013-Present)

Reagan (1985-1987)

House Republicans (1995-1997)

House Republicans (2013-Present)

Ideological difference = 1.0




Q&A

24

Multipolarity And Globalization: Incompatible...

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