Geo-economic themes for 2019 & beyond

Recently, I came across two talks by Ruchir Sharma (Head of Emerging Markets and Chief Global Strategist at Morgan Stanley), where he outlined some key geo-economic themes for 2019 & the upcoming decade (Asia Society, NDTV). While I am a big Nassim Nicholas Taleb fan and as a result, don’t care much for macro-predictions or extrapolations by economists, I do like to follow Ruchir’s work mainly because: 1) he presents really interesting data sets, which I can use to draw my own conclusions/ implications, and 2) he is someone who deeply covers both the East and the West. I do think it’s important for both founders and early-stage investors to at least keep an eye on global geo-politico-economic themes as they do impact tech businesses over the long term.

Here are the top 10 themes as presented by Ruchir. I find the supporting datasets particularly fascinating and therefore, have included their snapshots from the NDTV video. Am also including ‘MY TAKE’ for each theme, at least wherever I have a strong view.

  1. Peak America — Is America’s Decade Coming to an End?

This decade has clearly been America’s — as per Ruchir, while the US economy is ~25% of global GDP, its stock market cap is ~55% of global stock market value. Over last decade, while most major stock markets globally have given flat or minimal returns, the US stock market has tripled in value and is at a 100 year high compared to rest of the world.

Interestingly, Ruchir has identified a trend wherein every decade has some sort of a global economic theme that dominates investor interest. However, that theme never gets repeated in the following decade. As per his analysis, the US has ‘peaked’ in both economic and financial terms, and therefore, could see a slowdown starting 2019 and spilling over to the next decade.

MY TAKE: Clarifying the time frame being considered for this analysis is really important. In the short-term — yes, I would agree with Ruchir. With what one sees on the ground (excess liquidity all over, over-optimism at large, tech stocks bull run), it does seem like we are near or at the peak of the economic cycle and over next 24 months, various indicators will definitely tighten. However, over the long term (10yrs+), I continue to be extremely bullish on the US, mainly because of my belief in its inherently-entrepreneurial & innovation-driven economic and social fabric. My personal view is — US will continue to attract global knowledge talent for several decades to come (irrespective of political cyclicality), will lead in IP-driven innovation & deep-tech, and will surely be one of the leaders of whatever wave(s) that happen next (crypto, blockchain, AI & beyond).

2. Rise of Anti-Bubbles

Ruchir defines ‘Anti-Bubbles’ as countries where, despite healthy economic indicators, their GDP is surprisingly, lesser than the market cap of some of the top US tech companies. This, to him, doesn’t make sense. He feels that once the current tech wave slows down, the Anti-Bubble markets that have been unfairly neglected in favor of US tech stocks, will start seeing huge capital inflows.

Just to give a sense of how much global investors have been prioritizing US tech stocks over entire countries — India’s total GDP is less than the FAANG combined market cap.

MY TAKE: ‘Anti-Bubbles’ is a very interesting concept. While I understand where Ruchir is coming from in macro-economic terms, I think there is a larger point here — to me, technology is changing the very nature of the way our world operates & is segmented. Concepts like defined nation-states, insular GDPs, trade borders etc. are being disrupted right in front of us. To keep pace, traditional economic metrics and analysis methods also need to evolve to correctly reflect the updated realities of how markets, economies and societies are going to operate going forward. That’s where the gap is right now!

3. Why Global Interest Rates Can’t Rise Much

Global debt has risen from ~2x GDP in 2000 to >3x in 2018, with China borrowing the most since the 2008 crisis. Given these high debt levels, global interest rates can’t rise beyond a certain level, as central banks need to avoid large-scale repayment failures.

MY TAKE: No particular comments.

4. De-globalization

Trade as a % of global GDP has come down from ~60% in 2008 to ~55% in 2018. There has been a backlash against globalization all across the world this past decade, with protectionism on the rise across countries. Most notable example is the ongoing trade war between US & China.

Interestingly, there are a bunch of Asian countries that are benefiting from this trade war, including Vietnam & Bangladesh. US companies are now shifting their backend supply chains from 100% China, to diversified across multiple manufacturing centers, especially in SE Asia.

MY TAKE: I have a few specific inputs on this theme:

A) Globalization is beyond the control of politicians. Beyond creating short-medium term barriers, they can’t fight the power of technology (the Internet) and stop global citizens from interacting & trading with each other. The real issue is — how do governments create policies to ensure that all sections of society benefit from globalization. Stopping globalization is not the answer, ensuring equitable distribution of its fruits definitely is!

B) The geo-political trend of countries standing up to China is going to get even stronger in coming years. Given China has an openly aggressive international posture politically, economically and militarily, I expect its disputes with rivals such as US, India, Japan, Korea & certain countries in SE Asia to continue.

C) As China transforms its economy from manufacturing-based to consumption-based, countries such as Vietnam, Thailand, Bangladesh and India really stand to benefit from global companies diversifying-out their procurement from China.

5. The Anti-Establishment Wave

There is a clear trend of right-wing political parties coming to power across multiple countries. Interestingly, the average age of world leaders has also steadily been going up.

MY TAKE: No particular comments.

6. Fiscal Indiscipline Rising Everywhere

Global avg. Fiscal Deficit as % of GDP has gone up from ~2.25% in 2013 to ~3% in 2019(P). Case in point is India, where farm loan waivers have increased massively since 2016.

China spends 3x of India in terms of capital investments. While India has focused on waivers & subsidies at the cost of govt. spending on infrastructure, China has doubled down on investments & capital spending to drive growth.

MY TAKE: No particular comments.

7. India Still a One-Engine Economy

India’s growth is primarily driven by domestic consumption. As per Ruchir, it’s hard to consistently grow at 8%+ just with a consumption-based economic engine. Like China, India needs an investment-based engine as well, to complement consumption.

Another concern related to India— with rising consumption, household debt is also rising significantly.

MY TAKE: India’s consumer story is probably one of the most attractive investment areas in the world. Most startup activity is also in this space, be it eCommerce, payments, entertainment or food delivery.

Personally, I wouldn’t worry too much about the household debt situation as current debt levels are still far below developed markets and also, India has a strong savings culture that counter-balances the debt issue.

As a tech founder & investor, I would like other sectors of India such as enterprise software, manufacturing, agri etc. to also catch up with consumption, in terms of growth & investment attractiveness.

8. Growing ‘Tech-lash’

Tech has been the least regulated space across the globe, particularly in the US. This is changing now, as lawmakers realize the impact of these technologies and the need to study & better regulate them.

MY TAKE: Personally, I welcome constructive regulations that make tech companies more responsible towards consumers on issues such as privacy, harassment, data security, financial scams etc. The power of tech in our lives is only going to grow; it would be foolish to assume that it can be left unbridled. In fact, clear, non-ambiguous and forward-looking regulations will create a more sustainable environment for emerging technologies such as blockchain & crypto, AR, VR etc. to flourish.

9. Next US-China battle Will be All About Tech

MY TAKE: Frankly, the only country giving serious competition to the US in new-tech is China. Having developed a walled-garden Internet ecosystem that has spawned local giants (Alibaba, Tencent, Baidu etc.) rivaling the likes of Google & Facebook in scale & market cap, China is now focused on becoming an AI leader. I believe issues such as weak IP protection, outrageous data control and walled-off ecosystems, combined with an aggressive international political stance at a country level, will lead to significant headwinds for Chinese companies looking to expand globally. This is where US tech companies will continue to have an edge, followed by players from the EU, India and SE Asia.

10. King USD No More

The dollar has had a fantastic ride over last few years, backed by solid economic & financial performance from the US. Ruchir feels that the USD has peaked and will get weaker going forward.

MY TAKE: am no currency expert so have no comments :).

To Conclude:

My big takeaway from Ruchir Sharma’s top 10 themes for 2019 is that we are at or near the top of the economic cycle in the US. Excess liquidity & tech has been the main driver of this decade-long bull cycle, and given natural cyclicality, could see a cool-down period over next 12–36 months (which would be good for everyone, I think). In the short term, makes sense to proactively manage for this potential upcoming volatility by diversifying, both from a career and personal finance perspective. Personally, I continue to be a long-term bull on the US, primarily because of my confidence in its inherent entrepreneurial innovation engine & continued ability to attract the best global talent.

China has had a fantastic last decade domestically; however, I see major headwinds for it from a globalization perspective. Having seen its tech prowess, talent pool and national focus from close quarters, I wouldn’t discount China’s ability to pull another growth rabbit out of its hat (similar to manufacturing in the 90s and Internet-consumption in the 2000s). Maybe AI?

India continues to have a strong domestic consumption story, and will continue to chug along. It’s a democratic and highly heterogenous country — given fragmentation & high degree of local complexity across multiple elements, it’s hard to see it growing at China-like levels (which can only result from a China-like centralized political system). Which is fine, as India will continue to grow sustainably & by-consensus. Ideally, would like to see the Indian economy unlock one more major engine of growth — enterprise software for the world? Domestic manufacturing? Commercial use of space?

Overall, looks like we are in for an interesting 2019, and the decade ahead!

Source: all data snapshots are from Ruchir Sharma’s NDTV interview.

Author: Soumitra Sharma

Operator-Angel I Product Leader I US-India corridor I Believer in Power Laws I Love building & learning

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