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HAPPY Newsletter, January 2021 2021 Read more RCEP: Great deal or not a big deal? Read more Read more Global economic outlook for 2021 Asset managers to join the war on climate change Read more Read more World markets update Get in touch if you want a meeting
RCEP: GREAT DEAL OR NOT A BIG DEAL? 81 / 2019 2021 HAPPY 2021 RCEP: Great deal or not a big deal? On November 15, after eight years of negotiations, 15 countries signed a trade agreement forming the world’s largest trade bloc. Hailed by the leaders of those states at the time as a landmark triumph for free trade, news of the Regional Comprehensive Economic Partnership (RCEP) agreement pushed Asian share markets up and left some commentators declaring it a triumph of free trade. But not everyone is so enthusiastic, and some experts have said it is far from the amazing deal it’s been made it out to be. We take a look at what the RCEP is and what it means for global trade and investment. When all 10-member states of the Larger than the EU trade bloc and Association of Southeast Asian Nations the latest US-Canada-Mexico trade (ASEAN), China, Japan, South Korea, agreement, it will have a significant Australia, and New Zealand signed up effect on regional, and global GDP. The for the RCEP in November, they formed Brookings Institute estimates that the a trade bloc accounting for 30% of deal will increase global GDP by USD current global GDP and one third of the 500 billion in the next 10 years, while world’s population. other experts predict that the RCEP has www.1cornhill.com
RCEP: GREAT DEAL OR NOT A BIG DEAL? 1 / 2021 the potential to add more than USD relations among some of these countries, 100 billion to the national incomes of and other RCEP members, have been member states. strained over the years, but the RCEP has brought them together for trade. Under the agreement, tariffs and quotas will be eliminated for 90% of regional “You can both co-operate with someone trade in goods over the next 20 years, and just loathe them, even as a human with some removed immediately. It also being. RCEP has done an impressive job includes provisions for trade and business of separating itself from other things,” in other areas, such as intellectual said Elms. property, telecoms, financial services, e-commerce, and professional services. She added: “… the quality of RCEP actually exceeds expectations. It will Perhaps most importantly for deliver significant economic benefits to businesses, it creates new rules of many firms.” origin regulations for products. While many of the RCEP member states have And it is not just in the long-term that free trade agreements between each local economies will benefit, apparently, other, these do not always help some with the deal expected to help post- companies using international supply Covid economic recovery. chains. Even under an existing free trade agreement, some firms may find Its members said in a joint statement their products are subject to tariffs after the agreement was signed that because they contain components it would “play an important role in made in another part of the world. building the region’s resilience through an inclusive and sustainable post- For instance, under RCEP rules, a pandemic economic recovery process.” Japanese-designed car using parts from South Korea and then assembled in But while the details of the deal look China could be sold in any other RCEP impressive, at least at first glance, member state without third-country and country leaders have sung its tariffs kicking in because all countries praises, many experts believe its real and components involved in the significance lies not so much in what production of the car fall within the rule is includes, but what, and who, it does of origin regulation. This is expected to not, notably the US. incentivise companies to focus supply chains within the region. Under then-President Barack Obama, the US had driven plans for the Deborah Elms, from the Asian Trade Trans-Pacific Partnership (TPP) trade Centre, explained the advantage. agreement which would have brought Speaking to Reuters, she said: “The together the world’s largest economy existing FTAs can be very complicated with a number of Asian-Pacific to use compared to RCEP.” economies, although notably not China. The RCEP has also created some other The TPP was signed by 12 states in history – it is the first time China, Japan 2016, but Obama’s successor, Donald and South Korea have been in a single Trump, pulled out of the deal and some free trade agreement. Diplomatic of the remaining TPP members went www.1cornhill.com
RCEP: GREAT DEAL OR NOT A BIG DEAL? 1 / 2021 on to set up the Comprehensive and partners, especially China, have been Progressive Agreement for Trans-Pacific fraught during his term. Partnership (CPTPP), which includes seven RCEP members. But at the end of January, Joe Biden will be sworn in as the next president and it is widely thought that trade relations between the US and China, will be more stable, at the very least. He is not, though, expected to suddenly reverse the last four years of American trade policy and make a bid to re-join the TPP’s successor. “I’m not sure that there will be much focus on trade generally, including efforts to re-join the TPP successor On 15 November 2020 Vietnam played virtual host to the ratification grouping, for the first year or so of the Regional Comprehensive Economic Partnership. because there will be such a focus on COVID relief,” Charles Freeman, senior vice president for Asia at the Some experts say the fact that the US is US Chamber of Commerce said in in neither of two of Asia’s largest trade November, according to Reuters. deals is to the country’s disadvantage. What the RCEP will do to US trade As James Chen, Director of Trading influence in the Asia Pacific region & Investing Content at Investopedia, remains unclear at the moment, but wrote: “The exit of the United States what Biden does next will be key. from the CPTPP represented a pull back for a country that once was a “Whether [the RCEP] means a shift in global champion of free trade. The the regional dynamic in favour of China inclusion of China in RCEP and the depends on the US response,” William absence of the United States suggests Reinsch, a trade expert at the Center for that the Asia Pacific region is moving Strategic and International Studies, said. ahead on its own. The deals may be less comprehensive, but they are still “If the US continues to ignore or bully getting done. the countries there, the influence pendulum will swing toward China. If “The most important takeaway, however, Biden has a credible plan to restore the is that the United States may be losing US presence and influence in the region, its global leadership on trade to nations then the pendulum could swing back within the Asia Pacific region.” our way,” he told Reuters. During his time in office, Trump has With the US possibly the biggest loser used tariffs, sanctions, and trading bans from being outside the RCEP, the TPP’s to enforce what he frequently espoused successor, its biggest winner is likely, as an ‘America First’ trade policy. many believe, China. Relations with some major trading www.1cornhill.com
RCEP: GREAT DEAL OR NOT A BIG DEAL? 1 / 2021 The RCEP will only enhance the region and point to its limitations country’s already prominent status in compared to other, more comprehensive the region and was seen from its outset trade deals, including the CPTPP. by many experts as a means for China, as the world’s second largest economy Although it has fewer member states and key trading partner for most other signed up, the CPTPP goes further in Asian countries, to exert its power to its tariff cuts than the RCEP and also shape regional trade policy. covers areas on the environment and labour while RCEP does not. “Beijing will likely claim victory upon the signing. It has been a promoter Australia’s former Prime Minister Malcolm of RCEP since day one,” Wendy Turnbull, who signed his country up to the Cutler, vice president at the Asia TPP, said: “There’ll be some hoopla about Society Policy Institute wrote on the the signing and the entry into force of organisation’s website. RCEP. I mean RCEP is a really low ambition trade deal. We shouldn’t kid ourselves.” “The US retreated from the regional stage and pursued a trade policy based Writing in Forbes, global business on unilateralism, Chinese leaders used expert Harry Broadman said that while that vacuum to portray Beijing as the the agreement sent a positive signal reliable partner of choice for economic during a grim period for the world growth, trade, and investment,” she said. economy, RCEP was far from what some supporters had claimed. At the same time, it will also help the resilience of China’s domestic industries, “RCEP has been billed as creating the allowing Beijing to reduce its dependence newest and largest free-trade area in on markets outside the region. history. This claim is over-stretching the truth,” he said. Xu Liping, director of the Centre for Southeast Asian Studies at the Chinese Broadman pointed out that the deal Academy of Social Sciences in Beijing, told merely integrates existing free-trade the South China Morning Post: “The RCEP agreements between many of the signifies that there is a change in the countries involved and that there export market in the global supply chain. were significant obstacles to getting member nations to fulfil commitments “Considering US-China trade tensions, to reduce tariffs. and the uncertainties over trade with the EU, the RCEP gives China a new He explained: “First, these and committed market for trade which commitments for tariff reduction are to could ultimately change the global trade be phased in over 20 years. One must structure that has always seen Western ask: how relevant, then, will RCEP be countries as final trade destinations.” to altering trade flows and economic performance in the near term or even But while China may be the big the medium run? beneficiary of the RCEP agreement, some trade experts have questioned “Second, the largest player involved the extent to which it will truly improve in RCEP – China – hardly has a sterling existing trade arrangements in the track record for fully executing on its www.1cornhill.com
RCEP: GREAT DEAL OR NOT A BIG DEAL? 1 / 2021 commitments under trade agreements “So much for China abiding by the spirit, it signs. One need only consider that, to let alone the letter, of RCEP! One is date, China has not implemented some tempted to ask: Is this the RCEP way?” of the core reforms it legally obligated asked Broadman. itself to do under the terms of its accession agreement to be admitted as However, for all its potential shortfalls, a member of the WTO in 2001. the new agreement has, some observers suggest, highlighted an important “Third, perhaps most important, RCEP trend. does not include much in the way of structural provisions, such as those In a note to investors soon after the deal requiring China’s liberalization of was signed, economists at HSBC said, its state dominated enterprise and that the RCEP “signals that Asia keeps banking sectors, the operations of pushing ahead with trade liberalization which are laden with explicit and even as other regions have become implicit subsidies.” more sceptical. He added that while the creation of “It may reinforce a trend that’s been region-wide rules of origin may help already underway for decades: that the create stronger cross-border supply global centre of economic gravity keeps chains, it could have the negative effect pushing relentlessly to the East.” of providing “stronger incentives for the ‘decoupling’ of globally efficient supply chains – especially those integrating Asia with North America and Europe – than already is the case as a result of blunt government-administered policy mandates, which are being driven more by politics than economics”. Indeed, some nations’ commitment to the ideology behind the RCEP appears to already be in question. China and Australia are involved in an increasingly fractious trade spat and just days after signing the RCEP, Beijing imposed new import tariffs of between 107% and 212% on Australian wines. To find out more about Cornhill or our products please speak to your Regional Sales Manager or get in touch with us at newsletter@1cornhill.com www.1cornhill.com
2021 – WHAT’S IN STORE FOR THE GLOBAL ECONOMY? 81 / 2019 2021 HAPPY 2021 Global economic outlook for 2021 2020 was a year like no other. 23 November confirming that there would be a transition of power, from The Dow Jones Industrial Average (DJIA) President Trump to President-Elect hit a pre-Covid-19 high of 29,551.42 Biden, that sent the DJIA through the on 12 February 2020. Within days the 30,000 barrier on 24 November, hitting longest running bull market in history an all-time high of 30,045.84. – 11 years – came to an end as the Covid-19 pandemic caused massive For now, rising Covid-19 case numbers disruption throughout the world. in the US and Europe as well as the inherent logistical difficulties of In March we saw the fastest fall in distributing a vaccine make it difficult global stock markets in financial history to imagine that a return to normal is with the DJIA recording its largest possible or even likely in the near term. ever single-day points drop on 16 Yet, as the pandemic lingers, the global March. April witnessed the start of the economy continues to prove itself to be recovery and there was talk of a new remarkably resilient. Of course, some bull market. In early November news of countries have done better than others a safe, and effective vaccine saw the – China is the perfect example as we DJIA break through its pre-Covid-19 highlighted in our December issue – high but it was the announcement on but in general the world economy www.1cornhill.com
2021 – WHAT’S IN STORE FOR THE GLOBAL ECONOMY? 1 / 2021 remains on track to recover most of consumer and business sentiment. A the ground lost during the pandemic return to normality – catching a flight, in 2021. The International Monetary meeting friends for dinner – should Fund (IMF) is predicting the global be accompanied by an increase in economy will grow by 5.2% in the next household spending which should in 12 months. turn propel growth. The President-Elect has made repeated calls since the election for another US round of economic stimulus focussing on unemployment assistance, student In the short term the US economy is debt relief and a continuation of the facing some big challenges. Although moratorium on evictions to the tune of recent announcements around vaccine USD 2 trillion. Biden also has a series efficacy and approval from drug of Green Energy projects that he wants regulators are positive, very welcome to pursue although his primary focus and should indicate the beginning of the will be on growth and recouping the end of the crisis, it is clear that a fully- estimated 10 million jobs lost during fledged inoculation programme remains the pandemic. a distant prospect. Case numbers are rising rapidly now and it isn’t too hard If nothing else, a Biden-led White to envisage an overwhelmed healthcare House will instil confidence in the sector leading to the possibility of business sector as it reverts to a more further lockdown measures. predictable, multilateral approach to international relations and policy giving President Trump’s response to businesses the faith to invest more and the election result – multiple legal hire workers. challenges and claims of widespread fraud – is more than likely to leave a Obvious worry points include an trail of political animosity which could overcooked sense of optimism on the delay or limit any future government back of recent vaccine news – investors response to the pandemic, which in turn have positioned themselves, mentally if could potentially hamper the economic not literally, for upside gains – making recovery. markets vulnerable to bad news. It also seems likely that Republicans will Longer term though there are good control the Senate making any new signs: a vaccine exists, continued fiscal fiscal stimulus package subject to stimulus is in the pipeline and a more negotiation, clouded as they will be by co-operative and co-ordinated approach the tribal nature of the post-election to America’s international relationships hangover. with its allies and trade partners could all lead to an uptick in the second half Overall, projected growth of 3.8% in of 2021. 2021 with the recovery to really get going in the second half of the year. Rolling out the vaccine on a grand scale will take time, but as the roll-out gains momentum it should provide a lift to www.1cornhill.com
2021 – WHAT’S IN STORE FOR THE GLOBAL ECONOMY? 1 / 2021 One requirement of the Facility is that every disbursement must include an EUROPE investment in digitalisation. The idea is to not only help create jobs across Over the northern winter we expect to the economies of Europe but also see continued outbreaks of the virus modernise them in a balanced and and renewed lockdowns until a vaccine sustainable manner, ensuring that they becomes widely available. Having are well positioned should another said that Europe is poised for a strong pandemic-like shock hit the bloc. recovery – it suffered at the hands of the pandemic meaning its economy is The one notable exception in Europe’s set to rebound from a low base. Many recovery story is the UK, where the economic commentators are predicting seemingly open-ended and uncertain growth of 5.2% for the bloc as a whole. nature of Brexit will hinder the pace of recovery. Another crucial factor in the Positives include sustained EU funding UK’s economic recovery is the timing throughout 2021, supportive monetary and the way in which government and fiscal policies and the gradual support for jobs and businesses is reopening of the global economy from unwound. UK GDP for 2020 is set for an which Europe will benefit. For example, 11% contraction (yet to be confirmed) Europe is well positioned to gain from – one of, if not, the largest contractions China’s recovery as demand in China for among developed nations. However, western goods increases. the distribution of a vaccine and a favourable Brexit deal could lead to Europe has literally viewed the one of the biggest rebounds in 2021, pandemic as an opportunity to re-set its with some commentators predicting a economies. The first wave of lockdowns bounce back of between 6% and 7%. exposed a horrible truth – European countries that were lagging behind in digital infrastructure, connectivity and the ability to adapt to new ways of ASIA working suffered the economic effects of the pandemic more intensely and for Optimism for Asia is based on four longer. These same countries now also broad themes: have less chance of enjoying a strong or prolonged recovery. • The Asia region in general has done a good job of controlling the To combat this, the EU has set aside coronavirus EUR 672 billion in what it is calling the Recovery and Resilience Facility. • Widespread vaccinations are The aim is to mitigate the economic expected across the region by the and social impact of the coronavirus middle of the year pandemic and to build European economies that are more sustainable, • China has already recovered more resilient, and better prepared for significantly and continues to be the challenges and opportunities of the the growth engine for the global green and digital transitions. economy www.1cornhill.com
2021 – WHAT’S IN STORE FOR THE GLOBAL ECONOMY? 1 / 2021 • The recent signing of the Regional July-August 2021. They will undoubtedly Comprehensive Economic provide a boost to the Japanese Partnership (RCEP) reduces economy although to a smaller uncertainty in the region around degree than previously anticipated non-tariff barriers, supply chains given the toned-down nature of the and rules of origin while creating the event. Economic expansion of 2.5% is world’s largest trading bloc expected. China’s economy has returned to Australia has controlled the virus pre-pandemic output levels. This is outbreak better than most other a significant achievement given the countries, and with its relatively open complete shutdown and consequent economy, is better poised to benefit severe downturn its economy from the post-vaccine global recovery. experienced in Q1 2020. As part of The emergence of travel bubbles its recovery strategy the Chinese with its Pacific neighbours should government is striving to rebalance the help kickstart the tourism industry economy in favour of domestic demand which was hit hard by the lockdown. rather than having to rely on exports An increase in household spending, and capital investment in the future. supportive fiscal and monetary policy Over the course of the next 12 months measures and the gradual reopening it will begin to reduce the amount of of the global economy should fuel stimulus available while championing Australia’s rebound: a 3.2% expansion is domestic consumption. The China-US predicted for 2021. trade war and relationship in general should be less heated under President- Elect Biden. Stability and predictability will be Biden’s watchwords as he LATIN AMERICA tries to unpick the current tariffs and persuade China to improve access to its Latin American economies were some markets. The consensus is 8% growth of the worst hit by Covid-19, and for China’s economy in 2021. because of this we expect they will be some of the slowest to recover. Most Japan’s rebound from the pandemic is major Latin American economies are likely to lag other developed countries forecast to return to their pre-pandemic despite its less severe Covid-19 GDP levels in the second half of 2022 outbreak. This reflects Japan’s aging with Mexico drawing level in 2023 population and their cautious approach and Argentina beyond that. Overall to spending as well as mobility post- economic performance for the region is virus. The policy priorities of the new forecast at 4.1% for 2021. prime minister, Yoshihide Suga, will be a key focus early in the new year. The level of fiscal stimulus in Brazil Suga has already expressed interest in was high for the region at 12% of subsidising capital expenditure in an GDP, reaching 67 million people. It effort to drive increases in productivity was essential to supporting stronger across small and medium sized consumption during the Covid-19 businesses. And we should not overlook downturn but is set to expire at the the Olympics, scheduled to take place in end of 2020. With domestic demand www.1cornhill.com
2021 – WHAT’S IN STORE FOR THE GLOBAL ECONOMY? 1 / 2021 still fragile, any unwinding of stimulus levels post-2023. In 2021 growth of 4.0% measures is expected to provide a is forecast, subject to post-pandemic headwind to economic growth. Elevated global economic recovery of course. unemployment and ballooning public debt will also add to those headwinds. Growth of 3.4% predicted. Mexico is widely expected to have the AFRICA slowest economic recovery among Many African nations have seized emerging markets. Oil, tourism, the opportunity presented by the remittances and trade, the pillars of the coronavirus crisis to fast-track reforms Mexican economy, were already under and investment crucial for long term fire in an economy that contracted development. Digitalisation and for the first time in a decade in 2019. infrastructure top the list in terms of More losses were forecast for 2020 mitigating the effects of the pandemic before the Covid-19 outbreak which and cementing a sustainable recovery. simply compounded the problem. Worried about increasing national It’s no secret however, that over the debt, the government’s fiscal response last few years South Africa’s economy amounted to approximately 1% of GDP has been dogged by weak growth, high and focused on the country’s poorest unemployment, mounting public debt citizens, largely ignoring small to and persistent electricity shortages. medium-sized businesses. The result Covid-19 compounded the issues as the is an economy highly vulnerable to South African government implemented setbacks. Only the prospect of a vaccine some of world’s harshest lockdown being widely available in the near term restrictions in order to focus on saving could increase confidence and result lives. Consequently Q2 2020 saw GDP in a faster-than-expected recovery. drop 51% quarter-on-quarter. South Expansion of 3.8% is forecast. Africa’s road to recovery from such a savage contraction will be a long Argentina has a long history of political one. With ballooning public debt, the and economic instability. According government has limited fiscal space in to the World Bank, Argentina has which to manoeuvre so, like many other spent 33% of the time since 1950 in countries, the focus will be on economic recession. Today the country continues reform and putting in place policies to face severe economic constraints: that unlock a new growth path, one persistently high inflation, a heavy that is more inclusive, sustainable, and foreign-currency debt burden, and resilient. Special emphasis will need to low foreign-exchange reserves which be placed on unlocking opportunities has led to a scarcity of US dollars in presented by the digital economy. the economy. In 2021 this will mean Recent announcements such as the Argentina’s economic growth will reform of the electricity sector and remain susceptible to large swings unbundling the anchor that is Eskom keeping investment weak, and recovery into separate business units also give slow. Argentina is expected to have the cause for hope. Growth in 2021 is slowest recovery of all Latin American projected to be 3.3%. economies returning to pre-pandemic www.1cornhill.com
2021 – WHAT’S IN STORE FOR THE GLOBAL ECONOMY? 1 / 2021 Kenya, East Africa’s biggest economy, In Nigeria, the economy is expected is expected to grow by 5.0% in to bounce back in 2021 as domestic 2021. Although projections suggest demand recovers alongside the a relatively quick rebound for the global economy. However, its path economy, the length and severity of to recovery is a fragile one, clouded any future pandemic outbreaks plus by the uncertainty surrounding oil the pace of global recovery will weigh prices and production level caps. With heavily on key indicators such as a meaningful rise in oil prices not consumer spending and unemployment. expected until 2022, no great expansion The Kenyan government published its in GDP is expected any time soon. Other post-Covid Economic Recovery Strategy headwinds include social tensions and at the beginning of December 2020. security challenges, rising inflation The plan prioritises agriculture, water and elevated unemployment levels. and sanitization, urban development Balancing out these headwind factors and housing, transport, tourism, health, are the large size of Nigeria’s economy, education, social protection, and gender low government debt levels relative to and youth as anchor sectors that will GDP and a comparatively developed help the country recover from the financial system with a deep domestic effects of the pandemic. Underlying debt market. Assuming a vaccine the plan are familiar themes: this becomes widely available later in the is an opportunity for designing and year, Nigeria will tick over with growth instituting stronger business models of 1.3%. – ‘Lean, Mean and Mobile’ – and the adoption of technology as a basic Sources: Bloomberg, Deloitte, Morgan Stanley, Fitch, World Bank, IMF, Focus Economics, business requirement. Kenya’s economy S&P Global, Haver Analytics was strong prior to the pandemic so it is well positioned to make a robust recovery. Its healthcare infrastructure, testing and contact-tracing systems are the benchmark for other African nations. The major challenge facing the government in 2021 is balancing the withdrawal of government support versus a backdrop of ever-decreasing fiscal space and growing national debt. To find out more about Cornhill or our products please speak to your Regional Sales Manager or get in touch with us at newsletter@1cornhill.com www.1cornhill.com
ASSET MANAGERS TO JOIN THE WAR ON CLIMATE CHANGE 81 / 2019 2021 HAPPY 2021 Asset managers to join the war on climate change Dozens of the world’s largest asset emissions reductions within the managers have pledged to only invest in sectors and companies in which the companies with net zero emissions by asset managers invest”. 2050 as investors increasingly demand corporations play a part in tackling the global climate crisis. “The transition to net zero will be the biggest transformation in economic history In a statement a group of 30 companies, and we want to send a clear signal that which includes the likes of Fidelity there is simply no more time to waste.” International, Schroders, and UBS Asset David Blood Generation Investment Management Management, said they would work with their clients to cut emissions across their investments with an aim The companies behind the initiative, for all companies in their portfolios to which was announced in early be decarbonised by 2050 or earlier. December to mark the fifth anniversary of the Paris Climate Agreement, are to The group, which calls itself the Net set interim 2030 targets to decarbonise Zero Asset Managers Initiative, said their portfolios which will be reviewed they were committed to “prioritising every five years. They have also pledged the achievement of real economy to use their shareholder voting and www.1cornhill.com
ASSET MANAGERS TO JOIN THE WAR ON CLIMATE CHANGE 1 / 2021 lobbying power to promote and support The announcement by the Net Zero action on climate-saving proposals. Asset Managers Initiative also comes as shareholders increasingly appear to David Blood of Generation Investment be flexing their muscles on corporate Management, another of the firms environmental issues. behind the initiative, said: “The transition to net zero will be the biggest In September, an initiative representing transformation in economic history investors who together manage more and we want to send a clear signal that than USD 47 trillion of assets demanded there is simply no more time to waste.” that more than 160 of the world’s largest greenhouse gas emitting firms commit to setting net zero targets for From the end of 2019 up until September 2050 or sooner. 2020 there has been a threefold increase in the number of companies committing themselves The Climate Action 100+ initiative – publicly to reach net zero emissions. which is backed by more than 500 UN statement citing research report entitled ‘Navigating the global investors – announced it was nuances of net-zero targets’ Authors: Data-Driven EnviroLab and the NewClimate Institute, 2020 writing to 161 CEOs and chairs of the board at “focus companies” it had identified as collectively responsible Blood, who co-founded Generation for up to 80 per cent of global industrial Investment Management with former greenhouse gas emissions, urging them US vice-president Al Gore, added: “The all to set out net zero-aligned business opportunities to allocate capital to this plans as soon as possible. transition over the coming years cannot be underestimated. Without the asset The companies it was targeting included management industry on board, the many of the world’s largest oil firms, goals set out in the Paris Agreement as well as car producers, major mining will be difficult to meet.” The initiative companies, energy firms, and chemical is the latest high-profile commitment and industrial manufacturers. to helping tackle climate change from major firms in investment and finance. As major shareholders in many of the world’s largest companies, the In October, banking giant HSBC asset managers behind the Net Zero announced it would target net zero Asset Managers Initiative potentially carbon emissions across its entire hold great power. And they are now customer base by 2050 at the latest, prepared to exert that power to ensure as well as extending up to USD 1 trillion corporations focus on ways to reduce in financing to help its clients make their environmental footprints. the transition. Stephanie Pfeifer, chief executive of Other international banks, such the Institutional Investors Group on as BNP Paribas, have made similar Climate Change and founding partner commitments while earlier this of the initiative, told the Financial year JPMorgan said it would expand Times, that the scale and significance investment in clean energy and work of the asset managers joining the group towards net zero emissions by 2050. was a “clear signal” that the “financial firepower” of institutional investors will www.1cornhill.com
ASSET MANAGERS TO JOIN THE WAR ON CLIMATE CHANGE 1 / 2021 be “committed to making real progress Pressure groups questioned whether the towards a net zero and resilient future”. bank’s commitment was serious at all. However, not everyone is happy. The Adam McGibbon, UK energy finance wider investment community has come campaigner at Market Forces, told in for criticism in recent years from Reuters the pledge was “zero ambition, activist groups who say it is not doing not ‘Net Zero Ambition.’.... If you want enough to actively support climate to know what HSBC’s stance on climate action, such as withdrawing investments change really is, look at what they fund, from carbon-intensive industries or not their fluffy marketing.” backing cleaner companies. Some campaigners are sceptical of the “2020 may be remembered as the year the latest pledges from the Net Zero Asset world finally took decisive steps to address Managers Initiative. climate change and shift toward a greener future. This shift will have significant They point out that the pledge allows consequences for markets and investors.” companies to use the controversial Geraldine Sundstrom Portfolio Manager, Asset Allocation at global asset managers Pimco practice of carbon offsetting, which in practical terms would do little to stop the expansion of fossil fuel companies. Meanwhile, Pinson said: “The very bare minimum would be to immediately Lucie Pinson, the founder and director exclude all companies with coal of activist group Reclaim Finance, expansion plans and require others questioned whether the sated ambitions to adopt a coal exit strategy, as BNP of the initiative would be met. Paribas and many more serious banks have already done.” She told The Guardian: “It seems unlikely, given that there is no collective To what extent the pledges of the commitment to exclude coal or to likes of HSBC, or the Net Zero Asset halt the expansion of oil and gas, both Managers Initiative, do or do not make seriously at odds with the stated goal of a significant impact on efforts to tackle this coalition.” the climate crisis, there appears to be a growing corporate trend towards Indeed, continuing investments in fossil addressing the issue of companies’ fuel industries, especially coal, have carbon footprints and emissions. drawn some of the strongest ire of people like Pinson. When HSBC made According to the UN, using data its announcement in October, it gave published by the Data-Driven EnviroLab no indication it would tighten its policy and the NewClimate Institute, there on lending to the coal industry, which was a three-fold increase in companies remains crucial to many Asian economies. committing to reach net zero emissions between the end of 2019 and September The bank said at the time it would 2020. It said the number had grown to continue to take into account “the 1,541 in 2020 from around 500 recorded unique conditions for our clients across in 2019, as many prioritize climate action developed and developing economies”. in their recovery from Covid-19. www.1cornhill.com
ASSET MANAGERS TO JOIN THE WAR ON CLIMATE CHANGE 1 / 2021 But as the UN pointed out, it is not just Writing on the company’s website she individual companies making such explained that climate change is likely pledges. In the same period there was to become a central theme for countries a nine-fold increase in regions making looking to exert their global power with the same pledge, with an additional 101 major nations promoting green strategic in 2020 from 11 recorded in 2019. And efforts such as hydrogen energy. there was an eight-fold increase for cities, with 823 more in 2020 from 100 “Whether it’s due to countries pursuing recorded in 2019. geopolitical domination, or because of good-hearted intentions, or just Governments in key countries due to the need to preserve limited and regions have also committed resources, the green wave has turned to becoming carbon neutral, or into a tsunami…. ‘Following the money’, significantly reducing emissions, by the in this case the digital and sustainable middle of the century. themes at the heart of the ongoing fiscal and secular trends, may open up China has said it plans to achieve carbon opportunities for investors as some neutrality by 2060, Japan has pledged assets may be revalued,” Sundstrom said. to do the same a decade earlier, and the European Union (EU) Parliament “In conclusion, going green may not has voted to cut its CO2 emissions only be the responsible and sustainable by 60% by 2030. In the US, President- thing to do – it may also be a compelling elect Joe Biden is expected to ramp up investment,” she added. the country’s efforts to tackle climate change and reduce emissions, stating that as President he will oversee the US re-joining the Paris Climate Agreement. Experts say these trends will be very significant for markets in the future. “2020 may be remembered as the year the world finally took decisive steps to address climate change and shift toward a greener future. This shift will have significant consequences for markets and investors,” said Geraldine Sundstrom, Portfolio Manager, Asset Allocation at global asset managers Pimco. To find out more about Cornhill or our products please speak to your Regional Sales Manager or get in touch with us at newsletter@1cornhill.com www.1cornhill.com
World markets update 1 / 2021 HAPPY 2021 WORLD MARKETS UPDATE GLOBAL Sentiment also lifted when US lawmakers agreed on a USD 900 billion Global equities tracked higher economic aid package and there was in December as markets were relief for investors across the Atlantic buoyed by regulatory approval as the UK and the EU finally agreed and roll-out of Covid vaccines and on a trade deal just days before the a new US stimulus package. end of the Brexit transition period during which trade had continued as During the month, first the UK, then if Britain was still part of the bloc. later the US and Europe, began roll- outs of the Pfizer/BioNTech vaccine, Stocks in a number of major developed while other countries also started markets hit record or multi-decade vaccinations with the same, or other, highs as the year came to an end. vaccines. This fuelled hopes of an Many managed to close 2020 in end to the pandemic sooner rather positive territory, having recovered than later and a quicker recovery from unprecedented falls in the for economies around the world. early weeks of the pandemic. www.1cornhill.com
World markets update 1 / 2021 US Europe S&P 500 3.8% Dow Jones 3.4% MSCI EMU 2.0% DAX 3.2% MSCI USA 4.5% NASDAQ 5.7% FTSE 100 3.3% CAC 40 0.8% US stocks hit new highs in December on the back of vaccine optimism, abundant In Europe, stocks made gains in liquidity, and as markets welcomed a December amid mixed sentiment as deal on a USD 900 billion aid package worries over rising coronavirus cases for the world’s largest economy. The were offset by optimism over Covid strong performance in December – vaccines, Brexit relief and positive there were more record highs set in the reaction to the US stimulus package. very last trading session of the month Lockdowns across the continent and – mirrored much of what had happened growing concerns over the possibility during an astonishing year for local of a no-deal Brexit weighed on benchmarks: the three major indices sentiment, despite optimism that recorded more than 100 record closes in Covid vaccines could help bring a 2020, and all finished well into positive relatively swift end to the pandemic. territory for the year. The Dow Jones But these worries eased at the end of rose 7.2% in 2020, the S&P 500 gained the month as a Brexit deal was struck 16%, and the Nasdaq surged 44%. and EU states began vaccine roll-outs. News of a massive new US stimulus Despite the positive performance on package also helped push markets equity markets, surging coronavirus higher as the year came to a close. infections remain a worry. Vaccine approvals and the beginning of their Meanwhile, experts have said they roll-out were welcomed by investors expect the Eurozone economy to who see vaccination as offering rebound next year. According to a hope of a relatively quick return to Financial Times poll of economists, something approaching normal in Eurozone GDP will rise by an average 2021. But President-Elect Joe Biden, of 4.3% next year as vaccines bring a among others, warned that the return to some semblance of normality coronavirus crisis would get worse in most countries and economies before it gets better and that it will be recover. However, they warned that a long time before the economy fully the effects of the pandemic will be recovers. The pandemic’s effect on the felt for some time to come with more economy was highlighted in readings than half of the 33 economists polled released during the month with data predicting unemployment in the showing retail sales contracted at 19-country bloc will rise above 10% a much worse than expected 1.1% for the first time in more than four in November. This was the worst years, while two thirds said Eurozone reading for the indicator since April. GDP would not get back to pre- Labour market data was also mixed. pandemic levels before mid-2022. In the UK, local shares, as proxied by the FTSE 100 index, finished higher for the month. However, 2020 was the www.1cornhill.com
World markets update 1 / 2021 worst year for the benchmark index Asia since 2008 as it lost over 14%, sharply MSCI Australia 6.1% Shanghai Composite 2.4% lagging many other major market MSCI ASEAN 3.8% Nikkei 225 4.0% benchmarks which managed to more KOSPI 12.2% SENSEX 8.2% than make up the ground they lost at the start of the pandemic. This was Japanese stocks closed out the month down to a number of factors, including and year on a strong note, hitting multi- the fact that the index lacks major decade highs just before the New Year. tech firms with financials, energy, The gains came as investors banked on utility, and defensive counters making global central banks next year continuing up a large portion of its listings. measures to support pandemic-stricken Brexit uncertainty also weighed on economies and welcomed a raft of performance during the year. positive news in the month, including vaccine roll-outs, a Brexit deal, and the However, there was relief as British and US stimulus package. In economic news, EU negotiators reached an agreement the government lowered its GDP growth on a Brexit trade deal just days before forecast for the 2020 fiscal year to a 5% the end of the transition period under contraction, down from an estimate of which Britain was still able to trade 4.5%, as new restrictions in the wake of a with the EU as if it were a member of second wave of coronavirus infections the bloc. Markets saw the sealing of began to hurt businesses. However, it the deal as having avoided a worst- upwardly revised its fiscal 2021 GDP case ‘no-deal’ scenario, but experts growth forecast to 4%, from a previous have described the agreement as ‘thin’ estimate for 3.4% growth. It said this was and pointed out that while companies down to the expected effects of stimulus will now have clarity on trading terms efforts. from 1 January 2021, many will have to adapt to new barriers and bureaucratic A mixed month for Chinese shares obligations and that agreements are ended with local benchmarks moving yet to be made on the services industry, to multi-year highs as optimism Covid which is far and away the biggest vaccines will help speed a return to sector of the UK’s economy. The lack of normal in many countries and drive information about access to European strong economic recoveries next markets for UK financial services year helped underpin local markets. companies is a particular worry. The But the month saw some pressure UK’s Office for Budget Responsibility on equities as tensions between has forecast that Brexit will cost Washington and Beijing flared again. the UK 4% of GDP over 15 years. Major index providers removed scores of Chinese companies from benchmarks In economic news, a revised estimate following an executive order from US of third-quarter GDP was released President Donald Trump. The firms with the economy contracting had been identified as having ties to 8.6% y-o-y, improving on an earlier China’s military. There are concerns estimate of 9.7%. The last quarter of among investors that more Chinese the year is expected to see a further companies will be targeted by the contraction due to new lockdowns. Trump administration as he prepares to leave office. In other news, regulatory www.1cornhill.com
World markets update 1 / 2021 authorities have begun investigations the renewed spread of the virus. The into e-commerce giant Alibaba central bank downgraded its 2021 GDP and ordered Ant Group, the world’s forecast during the month, lowering it largest financial technology company to 3.2% on the back of lower tourism and Alibaba affiliate, to break up its numbers. It now expects 5.5 million operations. Some analysts believe the foreign tourists next year, rather than moves – which followed earlier criticism the 9 million projected previously. The of Chinese regulators and banks by country saw nearly 40 million visitors Alibaba owner Jack Ma – are a clear in 2019. Meanwhile, the Malaysian signal from the government to other government launched a 10-year plan large, domestic tech companies that to help its tourism sector, which has Beijing is prepared to take action to curb lost an estimated USD 24 billion due their growing power. Meanwhile, China’s to the coronavirus crisis. In 2019 the official manufacturing purchasing country’s tourism sector accounted for managers’ index (PMI) reading fell to 51.9 16% of Malaysian GDP. Under the plan, in December from 52.1 in November. the government is looking to launch a The reading for the non-manufacturing number of initiatives, one of which is PMI, was also down, dropping to to focus on strengthening Malaysia’s 55.7 from 56.4. Although down, both competitiveness by branding the figures indicate continued growth. country as an ecotourism destination. Indian shares continued to track upwards Elsewhere, there were worries over in December, building on their surge in vaccine roll-outs in some parts of the the previous month. The local benchmark region. In Indonesia, the government Sensex and Nifty indices moved to signed an agreement with drug record highs during the period amid makers AstraZeneca and Novavax continuing foreign inflows and positive for 100 million doses of vaccines, but sentiment globally. Covid vaccine news experts have questioned whether the and support from global central banks infrastructure is in place to properly has helped keep local markets buoyant deliver them to the entire population. since the start of November. The central bank revised up its projections In other news, South Korea and Indonesia for the economy following vaccine signed an economic partnership progress with real GDP for the current agreement aimed at boosting financial year forecast to contract 7.5% investment and trade between the compared to an earlier 9.5% estimate. two countries. Under the deal, South Korea, which is among Indonesia’s top Pandemic worries weighed on markets ten trading partners and investors, in the ASEAN region during December will eliminate more than 95% of its as rising infection numbers sparked tariff lines. In return, Indonesia will fears of further lockdowns. In Thailand, eliminate over 92% of its tariff lines whose key tourism sector has been hit as well as provide preferential tariffs hard during the Covid crisis, shares were to support Korean investment. under pressure after a new outbreak towards the end of December led to the Economic growth in the Philippines government suggesting new restrictive should rebound over the next two years, measures may be needed to combat the World Bank has said. A gradual www.1cornhill.com
World markets update 1 / 2021 easing of coronavirus restrictions is coronavirus infections and subsequent expected to help businesses and the restrictions weighed on their progress country’s economy should grow 5.9% in the latter part of December. in 2021 – stronger than an earlier forecast of 5.3% – and expand 6.0% Among readings for key economic in 2022. The bank has forecast an indicators, in the NAB Business Survey 8.1% contraction for this 2020. for November there was a 7-point rise for the business conditions index to In Singapore, economic data was mixed 9, its highest level since March 2019. as industrial output in November grew Meanwhile, the confidence index jumped 17.9% year-on-year, ahead of consensus 8 points to 12, its highest reading since estimates. Biomedical and electronics April 2018. However, the employment manufacturing helped drive the better index was unchanged at -5 suggesting than expected reading, with electronics businesses cut jobs. The Westpac- output up 34.9% year-on-year and Melbourne Institute’s Consumer the biomedical sector registering a Sentiment index reading was up 4.1% in 40.6% rise. On a month-on-month and December to 112, the highest level in 10 seasonally adjusted basis, industrial years. This came against a backdrop of production increased 7.2% in November, positive news on the domestic economy again beating expectations. But there driven by consumer spending which was a surprise 4.9% year-on-year has risen sharply in recent months. drop in exports in the same month. It was the second consecutive month of declines and the largest fall for a year. Latin America MSCI Latin America 11.9% MSCI Chile 12.5% Korean equities, as proxied by the MSCI Brazil 25-50 13.4% MSCI Mexico 6.5% benchmark KOSPI index, closed the MSCI Colombia 24.8% MSCI Argentina 9.9% month at a record high to mark an end to a stellar year for the market. Latin American equities climbed in The index gained 30.8% in 2020 – its December against a backdrop of best yearly performance in 11 years. widespread Covid vaccine optimism and Gains during the month were driven by progress on the US stimulus package local heavyweight counters, including which helped boost risk appetite, and Samsung Electronics, as well as vaccine subsequently interest in local stocks. optimism and hopes for economic Many analysts are expecting regional recovery in 2021. This came despite shares in the coming months to regain growing concern over a third wave of more of the ground they lost in 2020 coronavirus infections in the country. relative to stock markets elsewhere. The government cut its 2021 growth However, rising numbers of Covid forecast, with GDP expected to expand cases continue to be a concern. 3.2% next year, down from a previous estimate for 3.6% growth, amid a steep During the month, data releases rise in infection numbers. The economy showed Brazil’s GDP expanded almost is expected to contract 1.1% in 2020. 8% q-o-q in the third quarter of the year. The news was widely welcomed, Australian equities made a strong start although analysts cautioned that to the month before a resurgence of growth is likely to weaken in the near www.1cornhill.com
World markets update 1 / 2021 future in response to rising inflation Agency said that of the 12 million and a predicted end to state pandemic- people who had left the workforce in related fiscal support. It is seen as April as the pandemic took hold, 9.9 unlikely that President Jair Bolsonaro million were now back in employment. will look to keep the government’s emergency financial support running In Argentina, the economy grew a beyond the end of 2020. Inflation in seasonally adjusted 12.8% q-o-q in the Brazil rose 0.89% m-o-m in November third quarter of the year, but shrank – higher than expected – on the back 10.2% y-o-y, official data showed. of increasing food prices. The central Despite the growth in the quarter, the bank left its key policy rate, the Selic country’s economy remains below its rate, unchanged at 2.00%, but bank pre-pandemic levels and authorities officials said they were aware of “the have imposed price and capital controls stronger inflationary pressure in the as they look to keep foreign currency short term”. They believe that the reserves up and rein in inflation. current price shocks are “temporary” This, though, has dented market but intend to monitor them closely. sentiment despite the government Meanwhile, Brazil’s economy added a having successfully restructured net 414,556 formal jobs in November, billions of dollars in debt earlier this according to the Economy Ministry. year. However, experts expect the It was the fifth consecutive month of final numbers for the year to show job gains with the retail and services that the economy expanded in the sectors taking on new workers. fourth quarter, as businesses continue to recover from earlier lockdowns. In Chile, the country’s second pension withdrawal bill this year has been signed into law. The new legislation Africa allows Chileans to withdraw up to MSCI FM Africa 4.8% FTSE/JSE 11.4% 10% of their pension balances as an MSCI South Africa 9.8% MSCI Egypt -1.6% emergency measure to help them MSCI Kenya 5.1% MSCI Nigeria 4.2% cope with the economic downturn caused by the pandemic. The central In Egypt, latest data showed a slowdown bank is using various mechanisms it in new business growth in November, had previously employed in August although firms continued to report a when the first pension withdrawal bill strong increase in sales overall. Export came into effect to absorb outflows volumes were up in the month, but the from the pension fund system. pace of growth softened from October on the back of lockdowns elsewhere. Elsewhere, in Mexico, retail sales fell Meanwhile, the central bank said Egypt’s by 1.4% in October from September in tourism revenues stood at USD 9.9 what was their first monthly decline billion in the fiscal year 2019/2020, down since April. Official figures showed sales USD 2.7 billion on the previous fiscal also fell by 7.1% in October compared year. In other news, Vodafone ended to the same month in 2019. It was also talks with the Saudi Telecom Company reported that the unemployment rate (STC) on the USD 2.4 billion sale of a stood at 4.5% in November, slightly less 55% shareholding in Vodafone Egypt. than the 4.7% registered in the previous Vodafone Egypt is the country’s biggest month. Mexico’s National Statistics mobile operator with a 40% share of www.1cornhill.com
World markets update 1 / 2021 the market and 44 million subscribers. Elsewhere, Kenya’s largest telecoms STC and Vodafone had reached a provider and one of East Africa’s most preliminary deal on the sale at the profitable companies, Safaricom, and start of the year, but had since missed parent companies Vodafone Group a series of deadlines to complete it. Plc and Vodacom Group Limited have signed an agreement to borrow up In Nigeria, the central bank is to make to USD 500 million from America’s USD 656 million available for the free sovereign wealth fund, US International conversion of some cars to run on gas. Development Finance Corporation, Authorities in the country, which is as the company looks to expand Africa’s largest oil exporter, plan to into Ethiopia’s telecoms market. The have 1 million gas-powered cars by company is bidding for a telecoms the end of 2021, and to convert 40% licence being auctioned in Ethiopia, a of all cars in the state within 10 years country it sees as offering significant as the government looks to end costly opportunities with a market of over gasoline subsidies and head off public 100 million people and relatively low anger over higher petrol prices. The uptake of mobile and broadband coronavirus crisis has hurt oil prices, services. In economic news, Kenyan which are crucial to state revenues, officials reported that tax collections and President Buhari has said the for the July-November period were situation has forced a new focus on down 16% compared with the same gas as an alternative fuel. Nigeria has period a year ago, as the coronavirus the world’s ninth-largest gas reserves. crisis continues to hurt the economy with company earnings down and firms In South Africa, the economy grew cutting jobs. Monthly tax receipts have by 66.1% (annualized) in the third been falling since the beginning of this quarter of the year. The figure, which financial year as the local economy has was better than most economists struggled during the pandemic. had predicted and the first positive reading for the indicator after four periods of contraction, followed a 51.7% contraction in the second quarter due to lockdown measures. But compared with the same quarter last year, the economy actually shrank 6%. However, analysts have warned that the economic recovery remains fragile with continuing virus risks and ongoing sluggish pace of reforms and more power shortages. Troubled state power utility Eskom implemented further rounds of rolling blackouts in the country during the month as its ageing infrastructure struggles to cope with demand. Some economists have said they believe it may be as long as 2025 before the South African To get in touch speak to your economy returns to pre-Covid levels. Regional Sales Manager or email us at newsletter@1cornhill.com www.1cornhill.com
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