“Today’s investors need to understand geopolitical trends as the main driving force of the market.” – Joachim Clement, CFA
Joachim Clement, CFA, has emerged over the last decade as a more insightful and compelling voice in economics. Well reasoned, harsh, ridiculous, and sometimes iconoclastic, his perspective, featured here Entrepreneurial investors Or on his personal site, Clement on investment, Is always an essential read.
Trained as a physicist and mathematician, Clement came to finance in an unconventional way and the application of a multidisciplinary approach is a feature of his analysis. He has included a variety of perspectives and is not afraid to take orthodox conventional money.
His latest monograph, Geopolitics: The interaction between geopolitics, economics and investment From the CFA Institute Research Foundation, this is a very ambitious endeavor. That is, Clement conducts literature surveys and tries to identify and analyze the geopolitical undercurrents affecting the economic future and determine which ones may affect the market, which are unlikely, and how investors can make concessions for them. He explores climate change, war and terrorism, resource shortages, big data and many other issues in depth and considers how each event affects the market, or not, and how analysts should approach them.
For his point of view Geopolitics, And market conditions in general, I caught up with Clement earlier this month. Our exchange follows a lightly edited reproduction.
CFA Institute: So tell us about it Geopolitics. What was the initial motivation to write this?
Joachim Clement, CFA: I’ve always been addicted to politics, but when it comes to translating political developments into my investment portfolio, I wanted the analysis. Most geopolitical advisers are trained statesmen and do not have a financial background. This means they are usually unable to distinguish between what is important for investment and what is not. I wanted to write a book on geopolitics from an investor’s perspective.
You wrote back in 2019 that Geopolitics and Populism Quantitative Easing (QI) is creating a new market description for the central bank-centric market system to succeed. How has research and writing about the book influenced your outlook?
This is confirmed by the 2019 post. I think the 2020s will be driven by three major geopolitical themes. First, the switch to climate change and renewable energy sources from fossil fuels will bring significant changes in political terms and will win and lose in the financial markets.
Second, the rise of China and its growing role in the world will transform international trade and increase competition between Western companies and Chinese challengers.
Third, in a world where data and access to it is increasingly important, cyber security and cyberwarfare will become increasingly important threats to individual companies and society as a whole. This is a little known fact but already today the cost of the US economy from cybercrime is between 0.6% and 2.2% of GDP. And two-thirds of the 1,300 companies surveyed in 2018 said they were the target of cyber-attacks, with each company losing an average of মিল 16 million a year.
During the research you made the most wonderful discovery Geopolitics?
The cost of cybercrime was one of the most startling statistics. But surprises are everywhere.
Take the rise of China. We’ve all heard of the Belt and Road Initiative that finances infrastructure that ensures that China has access to resources, suppliers and end customers. But Huawei and other Chinese manufacturers are also working behind the scenes to ensure that 6G and other technological standards of the future are not left out, which will shape the next decade and beyond.
Don’t get me wrong, China has the right to exert its influence on regulations and standards. I am just saying that most investors underestimate the influence that China is already having in the world economy and how it is working to become even more influential in the next decade.
An area Geopolitics The epidemic does not really delve deeply. Do you see the Covid-1 crisis as a geopolitical event?
To me, the epidemic is not a geopolitical event because it is not caused by political development or creating any major political conflict. I think it’s an external shock that’s short-term in nature.
That being said, China has digested the epidemic much better than most countries in the West and is already growing its economy over pre-epidemic countries. Meanwhile, in the West we are trying to get out of the hole we dug last year. This means that the rise of China has been accelerated by the epidemic.
You predicted last year that COVID-19 would result in less change than we expected. What do you think will change now?
Not much, in my view. I think it will take longer than many people expect to be normal and don’t expect to drop my mask or go on an international holiday in 2021.
Another thing that may change is that flexible work arrangements have become somewhat more acceptable in the sense that many people will want to work from home more often. Having said that, I don’t think work from home will become the new norm or office space for business will be significantly reduced. There is a huge value in personal interactions between people that cannot be replaced by video conferencing. And recent surveys by Microsoft and other companies show that this is indeed the case.
Epidemics and work from home have done a lot of damage to our productivity and our professional network. Yes, we are busy and seemingly more productive because we think we have accomplished more. But getting things done and being creative and changing your business productively are two completely different things.
International cooperation was central to winning the Cold War and supporting the post-Cold War world. The populist current has weakened that late international structure. Do you see anything that suggests that the trend will not continue?
It’s hard to say right now. There is a clear trend of public representation all over the world. At the same time, however, countries like Germany seem to be moving away from the Populist Party in response to their extreme failures during the epidemic. It will be interesting to observe in the next one to two years if the rise of populists will accelerate again because the epidemic fades into the background or these politicians will lose permanent influence.
How do you see the development of this new era of geopolitics?
Both the rise of China and climate change will be important drivers of markets and the global economy in the coming decade. As an investor, I am more focused on the rise of China in the near future because it is an impending development that in my view needs to be resolved within the next three to five years.
Climate change should also be addressed by then, but I think it’s a problem where we as a global society will try to get off the road as long as possible. This means that the amount of damage will increase and we will only seriously address the problem when it is too late or almost too late. So there, I hope this issue will be an influential one in the second half of 2020.
You live in London. What is your view on the UK geopolitical fault line? Brexit certainly seems to exist but the situation in Northern Ireland has been complicated and the chances of a second Scottish independence vote have not diminished. So if you hold your neck, what should investors invest in this excitement?
When it comes to the situation in Northern Ireland, I am quite relieved. From the history of problems we know that it is a political problem and many geopolitical scholars have a lot to say about it, but as an investor it is basically a non-fact. Northern Ireland is too small to make a difference.
The situation in Scotland is somewhat different. I think it is quite possible that in the next few years, we will see another referendum on Scottish independence and I would not be at all surprised if Scotland decides to leave the Union. This would be very bad for both Scotland and England and would probably cause a recession in both countries. So it will have a material impact on UK equities and bonds. But beyond that, I’m having a hard time seeing any big impact.
And in the United States, did the 2020 election, the post-election turmoil, and the first 100 days of the Joseph Biden administration change your outlook? Are you more bullish or less bullish in the United States?
I am more optimistic that the United States will keep pace with Europe on important issues such as climate change. Every survey in the United States shows that not only the majority of the population but also the majority of Republican voters now agree that climate change is real and that the United States has already been affected by it. This is strangely an approach that has not been in the minds of investment professionals in the United States and has resulted in many opportunities being missed.
Just think of it this way: surveys show that investors are willing to give up some returns to invest in more sustainable portfolios and they are willing to pay about 0.5% higher fees per year to invest in portfolios with sustainable investment angles. Still, many fund managers refuse to integrate ESG into their portfolios even though they can make more money and attract more investors.
What next? Do you have new books? Are there any areas of the market that you are particularly keen on these days?
I am very busy with my work at the moment and writing a new post for me every day Clement on investment Newsletter So, there are no books at the moment. But I can think about expanding my reach in the United States in the future. We’ll see. . .
Something I didn’t ask but should have?
Nowadays everyone asks me where inflation is going. So, I’m glad you didn’t ask this question because I don’t want to answer it anymore.
One geopolitical question that very few people are asking now is the risk of data theft and cyber warfare. I think at the moment it is an underestimated risk though as I said, it does a lot of damage and as I have described in the book, if the cyber attack is big enough it could cause another financial crisis or a severe recession.
Many thanks, Joachim.
Be sure to learn more from Joachim Clement, CFA Risk Profiling and Tolerance: Insights for Personal Asset Managers, From the CFA Institute Research Foundation, and sign up for his regular commentary Clement on investment.
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All posts are the author’s opinion. As such, they should not be construed as investment advice, or the opinions expressed must not reflect the views of the CFA Institute or the author’s employer.
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