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For the past few decades, Malaysia’s cross-border trade has been supported by the migration of technological know-how, high-skilled physical labour, capital investment, as well as raw materials and goods. These had positive spillover effects on international trade that strengthened the country’s integration into global value chains (GVCs).

Unfortunately, there are many signs pointing toward the decrease in Malaysia’s participation, or premature industrialization, in the manufacturing sector. That is why the government is introducing new policies to stimulate industry growth.

The Malaysian government unveiled a bold new initiative: the New Industrial Master Plan 2030 (NIMP 2030). The goal is to supercharge the nation’s economy in seven years with the manufacturing sector. During the 2000s, the manufacturing sector used to contribute up to 30 per cent of gross domestic product (GDP) with a value output of USD 28.95 billion. With the GDP valued at USD 78.32 billion, the government hopes to bring the manufacturing sector to the forefront of the initiative. It aims to address certain issues, particularly on deindustrialization, that led to Malaysia’s reduced participation in GVCs. By adopting a mission-driven strategy for industrial growth, fostering an environment that is open to doing business, and upgrading the logistics system with the power of technology, the government hopes it can boost growth and cultivate the country as a new manufacturing powerhouse.

Since the 1970s, Malaysia highly invested in electric and electronic equipment (E&E) and it has paid off. Today, the E&E industry alone contributes to 38.7 per cent of total export value, bringing the value of the industry to MYR 49.77 billion (USD 10.44 billion).

Thanks to several bilateral and regional free trade agreements Malaysia entered into, these strengthened the country’s GVC participation and further expanded exports. Interestingly, with the resilience of Malaysia’s GVC amidst the US-China trade war affecting chip technology, the country has become a preferred choice in the semiconductor industry globally. The country has been reported as sixth in the world for semiconductor exports, contributing to 7 per cent (USD 36.88 billion) of the total global market value of USD 526.8 billion in 2023.

Logistics and GVC participationTo determine the relevance of a country’s GVCs, the performance of a country’s logistics networks on international trade should be observed. Graph 1 shows that Malaysia’s index in 2018 was only around 3.22 (out of a 5-point scale), ranking the country fourth in the ASEAN region. According to the World Bank, Malaysia ranked 41st out of 160 countries in its Logistics Performance Index (LPI). One of the factors that led to Malaysia’s poorer score was red tape, which has turned off foreign investors from doing business in the country. After five years of hard work and strategic planning, Malaysia’s LPI score improved to 3.6, now second within ASEAN and leaping to 26th out of 139 countries. Let us not forget about the container ports in Malaysia located in Port Klang and Tanjung Pelepas, both of which are part of the top 20 container ports in the world. With this, Malaysia was crowned one of the countries with the best liner shipping connectivity and continues to make waves on the global stage.

This means that greater efficiency and lower operations costs, together with increased connectivity and improved ease of doing business especially in logistics, will increase the confidence of foreign investors in venturing into the Malaysian market. It also indirectly increases Malaysia’s GVC participation, making it a win-win situation.

FDI inflowsThe health of foreign direct investment (FDI) inflows in Malaysia helps multinational companies (MNCs) expand their business operations in the country. In turn, this opens opportunities for small and medium enterprises (SMEs) to work with MNCs in providing domestically produced goods and services. According to the Organisation for Economic Co-operation and Development (OECD), investments from MNCs help SMEs to enter and integrate in GVCs. This broadens the reach of SMEs with their exposure to new markets.

Net FDI inflows to Malaysia boomed as the country recovered from the COVID-19 pandemic, proof that the economy has what it takes to attract investments and grow further.

As shown in Graph 2, 2021 saw manufacturing as the main contributor for Malaysia’s FDI flows, particularly in E&E, transport equipment, and other subsectors. However, in 2022, there was a 21.7 per cent drop from MYR 208.6 billion (USD 44 billion) to MYR 163.3 billion (USD 34.46 billion). According to the 2023 report from the United Nations Conference on Trade and Development, this FDI slowdown was a global phenomenon due to the Russia-Ukraine war, rising food inflation, and a heavier public debt burden. Last year, Malaysia saw an increase in FDI of 15.3 per cent worth MYR 188.3 billion (USD 39.66 billion). Recently, the Malaysia Investment Development Authority has reported that the first half of 2024 has accumulated FDIs worth MYR 75 billion (USD 16.8 billion), a significant increase of almost MYR 63.9 billion (USD 14.4 billion) compared to January-June 2023. The high investment for this quarter is still dominated by manufacturing sector projects.

Apart from the manufacturing sector expansion, the Malaysian government also aims to attract investment towards information and communications as well as green technology. One evidence is Microsoft’s announcement of investing into technological services in Malaysia, particularly in cloud and artificial intelligence services, amounting to USD 2.2 billion.

Although the country has been dominant in the manufacturing sector, especially in E&E, this does not stop Malaysia from opening new opportunities for investors. As seen, the logistics and technology industries also play a role in attracting more FDIs to improve Malaysia’s GVC participation and overall economic efficiency.

The implementation of the NIMP 2030 creates a high-value industrial sector that’s more welcoming to local and foreign investors. The Malaysian Investment Development Authority has outlined guidance in line with the NIMP 2030 goals to attract foreign investors in certain sectors to create more positive spillovers towards the national economy. Apart from that, Prime Minister Datuk Seri Anwar Ibrahim introduced the 10-year Global Service Hub Tax incentive to encourage investment companies to make Malaysia a global service centre. Improved reputation as a one-stop shop for investor facilities will make it palatable for foreign nationals to do business in Malaysia.

This original article has been produced in-house for Lundgreen’s Investor Insights by on-the-ground contributors of the region. The insight provided is informed with accurate data from reliable sources and has gone through various processes to ensure that the information upholds the integrity and values of the Lundgreen’s brand.

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If anything, the 10 September US presidential debate has only revealed how the race is more uncertain than ever. Some polls point to a win of Vice President Kamala Harris, with around 48 per cent chance of winning according to an average of individual polls, while former President Donald Trump’s average has hovered around 47 per cent as of 4 November. Although these national polls give insights about a candidate’s popularity across the country, they are not an exact prediction of the final result. Many things can change as the conclusion to the election draws near. However, questions remain regarding the candidates’ treatment of US bilateral ties with Brazil, as well as how investors can benefit from this uncertain scenario.

On one hand, TrumpA Republican victory would mean a more protectionist American policy. Inward-looking trade policies, manifested in higher import tariffs and lower domestic taxes, will become more likely by 2025 if Trump returns to the White House. This will strengthen the US dollar against emerging market currencies and commodity exporters as an initial response. Higher import duties would raise domestic prices, and this inflationary effect puts pressure on interest rates at a time when the Federal Reserve has just begun cutting rates from record-high levels. Elevated interest rates would also push yields on government bonds higher, which is exerting further fiscal pressure as the US continues to navigate a delicate fiscal situation with gross federal debt amounting to over 120 per cent of GDP.

It is possible that Trump’s return to the Oval Office could keep long-term interest rates in the US high and make it harder for the Brazilian real to appreciate. In this scenario, investors can take advantage of sectors that would benefit from Trump’s policies; for example, investments in the oil sector can be a good bet.

On balance, a Trump win could weaken the Brazilian real. Higher import taxes would hinder some sectors of the Brazilian economy such as agriculture, where Brazil is more competitive. The Republican candidate defends trade barriers, including blanket tariffs of 10 or 20 per cent as well as additional tariffs of 60 to 100 per cent on Chinese goods. Although Brazil will be affected by Trump’s protectionist measures, a new opportunity will arise to reinforce trade ties with China given that Trump initiated a trade war against the mainland during his administration and promised to double down on this if re-elected. President Luiz Inácio Lula da Silva has been working towards closer ties with China and the BRICS bloc, with Brazil looking to join the Belt and Road Initiative. China is currently Brazil’s largest trading partner, as seen in Graph 1.

On the other hand, HarrisMeanwhile, a presidential rule under Harris would see more expansionary economic policies in the US. Her main proposals include raising minimum wages and additional infrastructure investments that would raise public spending. Fiscal expansion tends to put pressure on inflation, which could force the Fed to maintain or raise interest rates to keep price movements under control in the coming years. This situation could be disadvantageous for Brazil and other Latin American countries. A slower pace of interest rate cuts by the US Fed can influence the timing of the Brazilian Central Bank (BCB)’s own rate recalibration.

As shown in Graph 2, Brazil began its rate cutting cycle in July 2023, more than a year ahead of the Fed as domestic inflation risks eased much earlier, and even raised rates in September 2024. As such, the possibility of future rate hikes in the US to temper inflationary effects owing to greater federal spending under Harris would have a greater impact on fund flows in Brazil. However, Brazil faces less pressure to cut rates with a loose fiscal policy that’s supporting economic growth. Meanwhile, higher US Treasury yields would make Brazil’s outstanding sovereign and corporate debt more expensive.

However, Harris’ win would benefit emerging markets better compared to a Trump victory as she has a friendlier approach on international trade, favouring global economic stability especially towards emerging economies with strong commercial ties with the US. Greater trade openness under Harris would ease pressure on the dollar as it facilitates greater global trade. In this case, Brazil-US bilateral ties will prosper with Harris in power, creating a more stable economic environment that may support a stronger Brazilian real.

The Fed’s way forwardPolitics aside, easing inflation in the US coupled with mixed news of a declining unemployment rate and slowing job creation provide evidence for the Fed to reduce interest rates further after a 50-basis-point cut in September. However, maintaining a certain interest rate differential relative to the US attracts foreign capital. Given the current domestic context, the BCB has room to raise rates soon. The Brazilian economy grew by 3.3 per cent in the second quarter, outpacing market expectations, while wildfires across the country have elevated inflation risks yet again.

With Brazil’s main policy rate set at 10.75 per cent against the Fed’s 4.75-5 per cent key rate, a hike from the BCB would increase the rate differential and make Brazilian assets more attractive, and this would boost the real against the US dollar and thereby reduce import costs and temper inflationary risks in Brazil. This means opportunistic investors can still consider Brazil’s fixed-income assets, IPCA+6%, and government bonds as attractive options. Brazilian equities are currently cheap with the main IBOVESPA index trading lower year-to-date, providing an entry point for players to take positions in the stock market.

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The first US presidential debate for the November 2024 polls shed little light on the elephant in the room: the federal budget deficit.

If further tax cuts are to be on the economic agenda, the US shall run annual fiscal deficits over the next decade. As a result, gross federal debt – which was at USD 8.95 trillion equivalent to 61.8 per cent of GDP in 2007 – has surged to USD 30.8 trillion or 119.8 per cent of GDP in 2022. As of end-2023, federal debt already amounted to 120.6 per cent of GDP. Bigger federal debt payments take away funding for new public projects, which could possibly slow down economic growth in the long run. Further, large budget deficits typically translate to higher inflation and lower bond yields in the long term.

Debt and taxesIt is fair to say that running on large deficits is a key feature of the US economy. In 2019, this large deficit was less of a concern due to the low-interest rate environment that kept financing costs down. Back then, the impression was that cheaper borrowing rates provided more leeway for the level of debt which the US can sustainably bear.

Many view deficit spending as a viable strategy to bolster economic growth and is seen as good news by investors because stocks tended to perform well in the years that follow. However, the ballooning budget deficit has proven worrisome. In 2023, Fitch Ratings downgraded the US’ credit rating over the enlarged fiscal gap and loose federal policies to keep government debt under control.

There’s no such thing as free lunch, and aggressive borrowing to finance these large deficits will eventually catch up with the US economy. Tax cuts for the wealthy, as well as a pause in taxing Social Security benefits, could add to the deficit. Extensions of tax cuts to Americans earning less than USD 400,000 while increasing the corporate tax rate to 28 per cent (lower than the rate prior to 2019) will not alleviate the deficit burden either.

During crisis situations, it is almost always the case that raising tax rates is an option for anyone who is in office, albeit an unpopular political move. Such a quick fix provides a revenue boost in the short term but has the potential to stunt economic growth in the long term as it discourages consumption.

Additional borrowing from the government will also push bond yields even higher and trigger faster inflation, sending the economy back into the cycle of high interest rates and a heavier debt burden. The US Congressional Budget Office (CBO) projects that the yearly budget deficit will remain between 6.5-6.9 per cent of GDP until 2034, much larger than the 3.7 per cent annual average between 1974-2023. Changes in the pace of productivity growth, labour force growth, inflation, and interest rates could significantly widen the fiscal gap by nearly double, the CBO’s analysis show.

However, there is limited scope for the US to drastically reduce the size of its budget deficit. To do so would require spending cuts for low-priority expenditure areas, such as those unrelated to healthcare and social services. However, these may not be substantial enough to convincingly reduce the budget gap. At best, such spending cuts, along with possible fiscal reforms pursued to prevent another fiscal crisis, would ease the need for additional government borrowings.

Fiscal gap to stayRegardless of the outcome of the presidential election, we are looking at the prospect of increased fiscal pressure and therefore an eventual increase in interest rates in the US, together creating an expensive environment for additional federal borrowings.

Graph 2 shows there has been a noticeable surge in yields since mid-2022 when inflation climbed to as high as 9.1 per cent and in the aftermath of the COVID-19 pandemic. The 10-year Treasury yield was just slightly above 0.5 per cent in the second quarter of 2020, which increased to around 3 per cent come 2022. Now, Treasury yields are hovering above 4 per cent. Yields have risen in real terms too, trending well above the 10-year breakeven inflation rate that represents the level of price adjustments expected by the market.

Amidst the expectation of further interest rate cuts by the Federal Reserve, the risk of a bond market slump seems far in the horizon. However, the opposite scenario will occur depending on the economic policies that will be implemented by the winning party from the US elections on 5 November. Amid heightened uncertainty, investors should avoid long-dated Treasury bonds in the meantime as the prices of these instruments are highly sensitive to the long-term outlook of US economy. For US stocks, we remain overweight but continue to monitor the outcome of the polls and its impact on Wall Street shares.

Beyond the presidential race, much of the US’ future, including its ability to manage federal debt and the budget gap, will be shaped by Congress. If the next President secures full control over Capitol Hill, it would be much easier to get their legislative agenda going, and this includes issuing even more debt to finance the programs of the incoming administration. Currently, either candidate has not laid out significant reforms that would substantially lift US economic activity.

At present, attitude towards US investment instruments is very much coloured by concerns regarding the large budget deficit. Persisting budget deficits will likely lead to soaring inflation and interest rates, and the eventual tax hike. Still, we continue to prefer long-term US bonds as we monitor the pace and magnitude of the Fed’s rate cuts, which remains to be the most dominant force in the market.

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What’s shaping up like a déjà vu moment quickly shifted into a history-making election season in the US.

It will be a thrilling next few weeks as the US heads into another presidential election. What would have been a repeat standoff between incumbent President Joe Biden and former President Donald Trump has taken wild turns, with Vice President Kamala Harris replacing Biden. Market players pretty much knew what to expect from Biden or Trump as they have seen the country under both leaderships – and during the COVID-19 pandemic, no less.

What would a Trump vs Harris faceoff on 5 November mean for the financial markets? Offhand, we think market players will take a cautious stance as they await clarity on the future economic policies for the world’s largest economy. We believe investors should remain overweight on US stocks barring any major shocks, while succeeding rate cuts from the Federal Reserve will keep everybody happy.

US stocks climbUS stocks rallied following Biden’s shock announcement to leave the race, then attributed to the recovery of tech stocks after tumbling in previous weeks when Trump said he would further distance the US from trading with China. Positive economic data pushed stocks to reach new highs in September.

Politics is politics, and investors are aware of that. Share prices are generally unfazed by electoral maneuvers in the long term nor do they cause prolonged periods of volatility.

The American stock market had a strong start in 2024, even setting all-time highs in March, May, and early July. The rally sustains a winning streak since late last year but is unlikely to be attributable to the elections. We believe that election jitters, if any, are felt in US stocks within two to three months running up to voting day – and it is not a huge factor as one might think.

Graph 1 illustrates very little fluctuations in the S&P 500, Dow Jones Industrial Average, and the NASDAQ Composite stock market indices during election seasons, with major stocks reacting to economic news that affect long-term sentiment more than political noise. As JP Morgan explains, stock markets often rally after election day as the results are out, which takes away the uncertainty over US leadership.

Fears of a “hard landing” of the US economy dissipated in early 2023, making way for renewed optimism towards US investments. However, the two-year inversion of the yield curve – where returns on two-year Treasury notes are higher than yields on 10-year bonds –had renewed jitters regarding a possible US recession. This was the longest period of yield curve inversion in US’ economic history, dating back to July 2022 as seen in Graph 2, and reflects how traders believe that short-term risks outweigh gains from taking long-term positions. Spreads have normalized since September as the Fed began its rate cutting cycle.

We think recent recession fears are overblown as global investors are merely trying to maximize gains from US Treasuries ahead of even lower interest rates after a 50-basis-point reduction this September. The Fed is looking closely at job creation and unemployment data to guide future rate adjustments.

High interest rates in the US coupled with decelerating inflation and faster job creation have been propping up American stock values. The fate of the stock market will continue to depend on how corporates perform and how the federal government will manage its ballooning budget deficit.

Eyes on the CapitolWe think another exciting battle to watch out for will be in Congress. After all, the legislative branch brings to life the reforms (or lack thereof) of an administration.

A separate quest for dominance is unfurling in the Senate and the House of Representatives. Party control over the House, which is composed of 435 seats, has varied greatly over the last 10 Congresses. The division is more pronounced in the Senate in recent years, with current seats split 48-49 for Democrat and Republican senators, respectively.

Two outcomes would be critical for Wall Street: whether the next President will win only the Oval Office, and which parties will rule the legislative chambers. Surveys as of mid-October show Harris (48.5 per cent) with only a narrow edge against Trump (46.1 per cent) but Congress will likely turn out Republican.

Trump is looking to return to the White House after his 2020 loss to Biden which he continues to contest. If elected, he plans to reduce social assistance programs, downsize the federal government, tighten border controls, and impose steep tariffs on imports particularly those coming from China. Harris, meanwhile, wants to provide subsidies for first-time homebuyers and set caps on food price increases as a tool for inflation control. These plans require legislation to be enforced, and this is where party domination in both chambers is most useful. A Harris win will most likely trigger a sell-off in US Treasuries as markets expect her spending policies to inflate federal debt from the current level of 119 per cent of GDP.

A party’s decisive control over Congress would give clarity on the direction of national policies. If anyone needs a reminder on how powerful the US Congress is, recall the episodes of a government shutdown under Trump and under former President Barack Obama that paralyzed the entire federal government because lawmakers were unable to enact the national budget on time.

All told, it looks like a tight race to the White House and in Congress. Beyond political maneuvers, we advise watching out for cues on policy statements which would ultimately dictate how the US economy moves forward. Our primary scenario is we remain overweight on US stocks but are keeping a watchful eye on the outcome of the US elections.

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Even with a steady increase in revenues, Brazil’s federal government accounts closed the first half of 2024 with a deficit of BRL 70.6 billion (USD 12.7 billion), a 66 per cent increase compared to last year’s first semester, as shown in Graph 1. The numbers prove that the government is challenged in achieving its self-imposed zero deficit target this year. Finance Minister Fernando Haddad has made efforts to raise revenue collections, however, public spending posted a faster expansion. So far, this year has seen revenues climb by 10 per cent. The economics team’s last forecast is that the federal government will close this year with a deficit of BRL 29 billion, equivalent to 0.25 per cent of the GDP – already the upper bound of the government’s target range.

Uncertainties regarding the attainment of Brazil’s fiscal policy goals were one of the main drivers of the Brazilian real’s depreciation against the US dollar, which weakened by 12 per cent end-September compared to its 2023 closing level. These developments do not suggest the occurrence of an immediate financial crisis, but there is no space for complacency.

Strained tiesIncreasing doubts about the Brazilian market are fuelled by the looming replacement of the Central Bank of Brazil’s (BCB) board members as Governor Roberto Campos Neto, along with eight others, will finish their term by year-end. Campos Neto has been repeatedly criticized by President Luiz Inácio Lula da Silva, the latter insisting that interest rates are too high that it is stifling growth. The BCB has insisted on its independence and is proceeding with caution regarding further rate actions. In return, the BCB also stressed the importance of the national government meeting its fiscal targets, saying it will help rein inflation expectations.

The lack of fiscal prudence effectively raises government debt, as shown in Graph 2. Brazil needs to manage its budget gap as high public debt could be inflationary. Public resources will benefit if debt is kept under control, paving the way for increased government spending that, in turn, will lead to additional economic activity and revenues. However, signs such as parliamentary amendments, a Congress hungry for more budgetary power, and spending involving freebies for special interests, point to a steady ascent in government debt. Lula is better off sticking strictly to the fiscal framework his government drew up.

It will be up to the left-wing president to nominate new BCB members and appointments are subject to Senate approval.

Lula will have appointed most of the BCB board members if the nominations are accepted, and this could be perceived as providing increased support for bigger interest rate reductions. This was evident from May’s Monetary Policy Committee (COPOM) meeting, wherein Lula-nominated members voted for a rate cut worth 0.5 per cent instead of 0.25 per cent.

Market watchers took positively Campos Neto’s insistence on an independent monetary policy despite political pressure by basing rate decisions on technical parameters. However, his impending departure raises uncertainty about the BCB’s policymaking, already reflected in higher yields for future contracts and rising risk premia on long-term notes issued by the Brazilian government. These could potentially reduce the attractiveness of Brazilian debt papers.

Despite these challenges, there are still opportunities in the Brazilian market. Short-term fixed-rate bonds present a promising avenue. Financial agents have factored in a 100-basis point increase in the Selic rate in one year given the changes in the BCB’s leadership. Opportunistic investors can then take advantage of this situation and consider fixed-income assets, IPCA+6%, and government bonds as attractive options.

Taking advantage of US rate cutsThe start of monetary easing in the US can pique stronger interest towards investments in Brazil, but the course of the US presidential race can change everything.

The direction of monetary policy in the US is evident. In September, the Federal Reserve cut interest rates by 50 basis points, with the possibility of up to three cuts until end-2024. Data over the past couple of months show the American economy is growing steadily, with a declining unemployment rate and slower inflation.

Maintaining a certain interest rate differential attracts foreign capital. Assuming that the COPOM is inclined towards keeping Brazil’s key policy rate unchanged in its next meeting after a quarter-point rate hike in September, the rate differential must prop up the real against the USD, reducing import prices and inflationary risks.

The Fed’s actions also create a ripple effect in Brazil’s stock market. Historically, a rate cut in the US is followed by a rise in Brazilian stocks a year later, with valuations rising by an average of 30 per cent when expressed in the US dollar and 20 per cent in Brazilian real as seen in Graph 2, which shows the Bovespa Index (IBOV) through the years. Investors should take advantage of this and buy Brazilian shares now before the US Fed’s expected rate cuts are implemented. There is no certainty on how the market will respond this time around, but investors are probably aware of historical trends; it should not come as a surprise if Brazilian stocks will follow the same track again.

There is also the upcoming US presidential race and how each candidate will maintain bilateral ties with Brazil. On one hand, a Republican victory would mean loose company regulations and lower taxes, which would boost the US dollar against emerging market currencies and commodity exporters. Former President Donald Trump’s return to the White House could keep long-term interest rates in the US high and make it harder for the Brazilian real to appreciate. This would also place Brazil and the US in very distant ideological positions, although the foundations of the bilateral relationship between the countries remain.

On the other hand, the US under Vice President Kamala Harris would see more expansionary economic policies. Her proposals include raising minimum wages and more infrastructure investments that would raise public spending. A fiscal expansion may be inflationary and could force the Fed to keep or increase interest rates to rein prices in, and this would be disadvantageous for Brazil. Meanwhile, greater trade openness would potentially ease pressure on the dollar, benefiting global trade and stabilizing the US currency.

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Malaysia experienced slowdowns in global trade, elevated tensions due to geopolitics, and tighter monetary policies that led to a slower-than-expected 3.7 per cent expansion in 2023, missing the expected pace of 3.8 per cent. Still, the International Monetary Fund (IMF) predicts a positive outlook for a potential increase of up to 4.3 per cent in 2024.

Malaysia also contends with the challenge of a depreciating currency but has kept the benchmark interest rate at 3 per cent over the past year. Despite elevated borrowing costs, higher yields are used to attract additional foreign investments.

Gloomy indicatorsAs illustrated in Graph 1, the Bank Negara Malaysia (BNM) saw the ringgit experience two significant depreciations between March 2023 to March 2024, with the fall reminiscent of the exchange rate performance at the height of the 1998 Asian Financial Crisis. What caused this spell of ringgit depreciation?

First, consider internal factors – in particular, how the level of gross international reserves affects the exchange rate. Dollar reserves stood at USD 113.8 billion as of end-March based on BNM data. The amount is sufficient as an import cover for 5.6 months but just matches the country’s stock of short-term foreign debt.

External factors also play a role in the apparent undervaluation of the ringgit, such as the movement of the Chinese currency and its relation to the depreciation of the Malaysian currency. China’s economic slowdown has depressed demand for Malaysian exports, with total outbound shipments declining by 0.1 per cent year-on-year. If the sluggishness of China’s economy persists, every 1 per cent decline in Chinese GDP is estimated to reduce Malaysia’s economic growth rate by 0.6 per cent. Fewer exports will also result in a wider trade deficit.

Another factor is the economic influence of the US on global interest rates. The US dollar continues to strengthen relative to other currencies as the Federal Reserve has yet to unwind the series of rate hikes it introduced since 2022, keeping onshore margins higher relative to the rest of the world.

Graph 2 illustrates a substantial gap worth 183 to 230 base points between the Malaysian and US policy rates. This gap between domestic and global interest rates triggers investment outflows since higher interest rate abroad allows investors to obtain more competitive returns. However, the BNM has kept the overnight policy rate at 3 per cent for many months, attempting to stabilize domestic inflation and stoke faster and healthier economic growth amidst a slowing global economy.

BNM is aware of the ringgit’s undervaluation and has committed to provide “more enduring support” to the currency and rein capital flows back into Malaysia through its state-owned corporations.

Light amid uncertaintyAmidst the uncertainty affecting Malaysia’s economic position, there are opportunities being utilized to meet the economic growth targets set by the national government.

According to the Malaysian Securities Commission, the statutory body regulating and developing the Malaysian capital market, the capital market grew by 5.6 per cent in 2023, reaching MYR 3.8 trillion.

While the ringgit’s value experienced a severe decline after 26 years, this fall has not bled through the broader stock market. In fact, foreign investors have been taking the opportunity to invest in Malaysia with a stronger base currency while enjoying the potential for a huge economic upturn.

For trade, export-oriented sectors heavily depending on local inputs benefit greatly as they make bigger profits when dollar sales are converted into ringgit. Malaysia’s merchandise exports rose by 2.2 per cent in the first quarter of the year with increases in both the value and volume of goods. This came from the outbound shipments of iron and steel products, machinery, equipment and parts, petroleum products, and liquefied natural gas. Imports grew by 13.1 per cent to MYR 328.186 billion (USD 68.69 billion), resulting in a trade surplus of MYR 34.22 billion (USD 7.16 billion). This is the biggest quarterly trade surplus in Malaysia’s history.

The weakness of the ringgit also has a spillover effect on the tourism sector. In 2023, total tourist expenditures in Malaysia stood at MYR 71.3 billion (USD 14.92 billion), more than double the amount tallied in 2022 as pandemic restrictions have been fully lifted. According to Deputy Tourism, Arts and Culture Minister Khairul Firdaus Akbar Khan, the government hopes the sector will generate MYR 375.3 billion (USD 78.55 billion) in three years. This also opens up opportunities in the medical tourism sector. Based on the statistics of the Malaysia Travel Health Council, health travellers brought in revenue of MYR 1.3 billion (USD 272 million) in 2022. With the increase of MYR 1.92 billion (USD 402 million) in revenue seen in 2023, the government is confident the sector can achieve MYR 2.4 billion (USD 502.29 million) this year. This indirectly opens opportunities in other industries such as accommodation management for health travellers and logistics that will support even greater economic activity.

Although the value of the ringgit decreased significantly, the Malaysian government is seeking to regain some strength for the currency to a rate of MYR 4.20:USD 1 by the end of 2024. If this comes into fruition, the construction sector will benefit. Items such as steel bars and cement play a significant role in reducing construction costs which can motivate developers to complete large-scale housing and public transportation projects on time. With the weak ringgit now, every 1 per cent depreciation of the ringgit leads to a 0.15 to 0.25 per cent increase in construction costs.

Fortunately, the construction sector in Malaysia recently experienced high growth, with the first quarter in 2024 seeing 11.9 per cent growth compared to 3.6 per cent the previous quarter. According to BNM, the total value for construction work this first quarter, including those done for the property market, is MYR 36.8 billion (USD 7.84 billion).

Favorable policies on foreign ownership in Malaysia’s property market encourages foreign investors to buy property and do business there. Imports in the trade sector likewise provide cheaper supply of foreign-made goods, benefiting both foreign producers and Malaysian consumers.

Currently, Malaysia surpassed earlier expectations of economic growth of 3.9 per cent, posting a 4.2 per cent expasion during this year’s first quarter. Despite headwinds from China and the troubled global growth outlook, Malaysia demonstrates resilience and business confidence with small businesses seeing greater consumer confidence. With clear policies and diverse product options, foreign investors can cash in from the ringgit’s fluctuations.

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According to the Production, Supply and Demand reports by the US Department of Agriculture, Brazil is responsible for more than a quarter of the world’s production of key agricultural goods like fresh oranges, soybean oilseed, and coffee, along with a significant share of products such as sugar, meat, cotton, and corn.

With the evolution of Brazilian agribusiness, the sector has accounted for 24 per cent of the country’s GDP since 1994. The sector’s production, which was expected to reach an impressive BRL 2.6 trillion in 2023, was not the only aspect that’s remarkable about it; its significance in terms of employment provided livelihoods for over 28 million people. That constitutes approximately 26 per cent of the domestic labor market.

Agribusiness drives economic growthBeyond the national front, agricultural exports have been pivotal in the country’s trade balance and economic stability. In 2023, agribusiness exports reached a historic high of USD 166.55 billion, being responsible for 49 per cent of the total Brazilian export basket that year. The sector has also delivered an astounding surplus of nearly USD 150 billion, effectively offsetting the deficit coming from industry and services. What is more relevant is that agricultural sales have consistently guaranteed trade balance surpluses for over a decade and counting.

Moreover, Brazil’s robust agriculture sector is not just a historical foundation of economic strength; it is a dynamic force that continues to shape the nation’s growth. In the third quarter of 2023, the economy remained relatively stable compared to the previous quarter. However, it followed substantial 1.4 per cent and 1 per cent increases in the first and second quarters of the year, respectively. These numbers added to a cumulative growth of 3.2 per cent from January through September when compared to the same nine months of 2022. As showcased in Graph 1, agriculture once again played a significant role in Brazil’s growth with an impressive 18.1 per cent GDP growth in 2023.

While the third quarter saw a steep 3.3 per cent dip in agricultural GDP from the previous quarter, it was not unexpected due to the hard comparison with the outstanding performance in the first six months with expressive crops harvested. Still, in the year-on-year comparison, which considers the sector’s performance in the same periods in 2022, agriculture has exhibited extraordinary performances in all quarters of the year. These outcomes highlight the robustness and adaptability of Brazil’s agriculture sector, emphasizing its crucial role in the nation’s economic landscape.

Although traditionally reliant on private capitalization and government programs, the agribusiness sector is undergoing a transformative shift towards greater engagement with the capital markets. This transition is bringing forth new possibilities, such as private credit products tailored for agricultural financing, agriculture-related indices and exchange-traded funds or ETFs, and innovations like Agro-industrial Chain Investment Funds (FIAGRO) akin to real estate investment trust (REIT) products in the US. Additionally, recent IPOs of agricultural companies signal a growing alignment between the local financial markets and the agriculture sector, boosting access to financing and sustaining the growth of the farm sector.

Triumph in capital markets with FIAGROOne of the most promising innovations within the Brazilian capital markets movement towards the agribusiness sector has been the creation of the FIAGRO asset class, which are investment funds for investing in agribusiness investment assets. The financing of the sector can be done through three different categories: investment funds focused on agroindustry that invests in credit rights, funds with real estate assets, or investment funds in partnership interests. These funds are exchange-traded, and the income obtained from the sale or rental of rural properties is distributed periodically to its shareholders in the form of dividends.

The first fund is on its third year and the class has been a success ever since, with the net worth of all funds reaching BRL 20.5 billion in December 2023. In Brazil, REITs took 10 years to match what the net worth achieved by the FIAGRO in only three years. Besides that, the evolution of outstanding shares and number of investors have also reached record figures by yearend, as illustrated in Graph 2.

The development of investment products in the agricultural sector opened doors to a range of investment opportunities, linking one of Brazil’s oldest economic pillars with modern financial innovations. A deeper understanding of the agricultural sector especially by individual investors, the improvement of macroeconomic conditions, and the conclusion of the downward cycle of the Selic basic interest rate will play a crucial role in the development of this class. The meeting between agriculture and capital markets has the potential to not only reshape Brazil’s economic dynamics but also provide investors with multiple paths to growth and prosperity in this thriving industry, especially over the long term.

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There is no doubt that the global economy is not exactly bursting with momentum, which may stress equity investors, especially in a financial world returning to the normalcy where liquidity has a price.

Right now, the stress is even more pronounced in the bond markets, where the frustration is the inflation that still is not under control, especially in western economies. This has pushed interest rates up further, as graphic one shows, but conversely, graphic two shows that the credit market is not under pressure yet.

I view the past couple of weeks of declines in bond markets as a fairly late reaction in this cycle, particularly outside of Europe. It remains to be my view that the majority of bond investors soon will begin to look forward to the life after the high inflation period.

This does not change the fact that investors must search further to find good investment opportunities, and perhaps even work mentally on how to perceive developments. I think the World Bank’s latest assessment of the Asian economy is a good example. The growth prospects for the whole of East Asia were downgraded to 4.5 per cent GDP growth this year. The World Bank has commented that it is the lowest growth prospects for the region in more than 50 years – should investors be even more stressed by that?

No, because the consideration is one-dimensional, and partly just an observation. When global growth is under pressure, as it is now, it is felt everywhere, including in Asia. The hum is that Asian growth is after all, more attractive than elsewhere, but more importantly, it is also changing character. A great example is entrepreneurship, which a few decades ago was very much characterized by necessity, perhaps the only source of income was selling street food to tourists. Today, Southeast Asian entrepreneurship originates much more from households with saved capital and with ideas that create the base to establish new small growing businesses. It is just an example of how economic growth changes character, thus becoming a more self-reinforcing and revenue-generating in a different highly qualitative manner. For investors, this is an incredibly important development because the opportunities look different than before.

A good stress therapy for investors could be to deal with megatrends, as these long-term convictions provide a compass direction whenever the markets get rough.

Recently, I had a conversation about the global capital movements into green energy up to 2050, which is the biggest trend I have ever been able to point to in the financial markets. The best assessment I have is that no matter how much money and new ideas are generated, the UN’s climate goals will not be achieved. It may seem worrying at first glance, but an infinite number of good ideas and measures are coming, which is the good news, and they will have a positive effect. But at the same time, it also describes a gigantic wave of investments that one, as an investor, can choose to either simply observe or actively participate in.

This green wave reminds me of another wave that was set in motion on the 20th of November 1985. It was the day of the official launch of Microsoft’s Windows. I consider it a product that over time, changed global everyday life, and created the largest companies and sectors in the entire world. I have the same feeling about the new green deep tech energy technology wave, which has only just begun.

When I mention a green technology wave, I am primarily thinking of “green deep tech” and not, for instance, investments in wind turbines. As an example, for several years now, my own company has been involved in investments into CO2-negative oil production, which has also brought us on to other opportunities. The next option in line is possibly the production of CO2-negative jet fuel, which will be a huge step forward, and it really is an exciting world.

I expect investors who are already allocating extra time to a detailed understanding of green deep tech to reap an additional gain from another front. At the moment, inflation is a stress factor, but at some point, inflation will subside. However, it will return in a green form, because green consumption taxes are inevitable, it’s just a matter of time before they are introduced. I equate the taxes that are coming with a green VAT to create a new form of inflation. Ideally, the future green VAT will be earmarked for the green investment wave, but time will tell if that is the case.

The coming green inflation will stress the financial markets again, because I expect the green tax/VAT to increase every single year. One way for investors to counteract the negative effect of green inflation is through investments that profit from green taxes.

If one takes a step back from the current sourness in the financial markets, they might see a number of exciting investment opportunities. It may be in new geographical areas, but certainly in new sectors, and I can confirm that it takes a lot of time and energy to take that journey. On the contrary, it is one of the many exciting aspects of being an active investor, and I am absolutely convinced that the world is facing a new gigantic investment and technology wave, like back in November 1985.

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The tables have turned on Asia as far as climate change is concerned.

The Asian Development Bank (ADB) said Asia and the Pacific is now the source of 50 per cent of global carbon dioxide (CO2) emissions in 2019.

ADB defines “carbon intensive” investments as those that went into manufacturing, mining, quarrying, power and gas, and other business activities producing relatively higher greenhouse gas emissions and other pollutants. Their announcement comes after Asia accepted “carbon-intensive” foreign direct investments (FDIs) equivalent to one-third of global inflows between 2008 to 2016. Furthermore, as seen in graph 1, one would find that Southeast Asia is the second favorite destination of carbon-intensive FDI, accounting for 33.5 per cent of inflows.

Source: Asian Development Bank’s Asian Economic Integration Report 2023

The paradox worsens as 20 Asian countries have been identified as areas most at risk to suffer the ill effects of climate change, which is seen to disrupt livelihoods, displace households, and lead to injury and death. Three of the 10-member Association of Southeast Asian Nations (ASEAN), which has been leading global economic growth, are part of this group: Cambodia, Philippines, and Vietnam. For these countries, the impact of climate-related disasters is more pronounced for rural communities relying heavily on farming and fisheries. Rice, a staple food across ASEAN, is seeing double-digit price increases as the expected severe El Niño phenomenon began mid-2023. Bloomberg reported that importers like the Philippines and Indonesia raring to build deeper stockpiles as extreme weather conditions are seen affecting local crop production.

The region’s growing population coupled with rapid economic development also hastened CO2 emissions, the ADB said, signaling the increased need to take on steps to reduce CO2 production or reach net zero, where so-called green initiatives counter the volume of emissions.

The United Nations’ Sustainable Development Goals put emphasis on climate action across nations, spanning five items out of its 17-point goal by 2030. Goal 13 on climate action targets reducing CO2 emissions by 45 per cent between 2010 to 2030 to limit global warming to 1.5 degrees Celsius.

Selecting better, sustainable investmentsIt is understandable for developing ASEAN member-states to take a “more is better” approach toward FDI inflows to create more jobs and spur even faster economic growth. The modern view, however, requires policymakers to incorporate a sustainability lens in evaluating FDI prospects.

In recent years, there has been a stronger clamor for green and sustainable business practices from utilities and electronics to retail goods. ASEAN countries are particularly well-positioned to accommodate greater investments especially in “green” sectors.

DBS Bank estimates a USD 2.65 trillion to USD 3 trillion opportunity for additional green investments in ASEAN from 2016 to 2030, with the biggest need seen in infrastructure (USD 1.8 trillion), followed by renewable energy; energy efficiency; and food, agriculture, and land use. As seen in graph 2, Indonesia will be needing the biggest amount.

Source: DBS Bank

The Economic and United Nations’ Social Commission for Asia and the Pacific have said tighter regulations on the quality of inbound FDIs should be put in place to ensure sustainable development across industries.

‘Green’ means goDeveloping ASEAN faces the problem of under-investment in critical infrastructure and climate change mitigation initiatives given limited annual public sector budgets. To foreign investors, these present opportunities to enter Asian markets and participate in the region’s strong economic growth. We remain optimistic on ASEAN’s growth story, and further investments on sustainable projects will prop up its vibrance.

DBS estimates that Indonesia accounts for 36 per cent of the green investment gap, particularly in infrastructure and renewable energy sources. As an archipelago, Indonesia needs additional infrastructure in rural and remote areas, especially those which are not yet electrified or have intermittent to no communication signal. The Indonesian government has limited fiscal space to fund big-ticket construction in recent years due to COVID-19 response and fuel subsidies committed to consumers.

In the Philippines, additional FDIs are necessary for the power sector due to dwindling supply from the Malampaya natural gas field which has been supplying 30 per cent of electricity in the Luzon area, the country’s biggest island bloc and center of commerce. The Philippine Department of Energy is targeting to raise the share of renewable power sources to 35 per cent by 2030 and 50 per cent by 2040, coming from 28.9 per cent in 2021. Power plants in the Philippines primarily produce electricity using coal (42.5 per cent of the power generation mix), oil (16.1 per cent), and natural gas (12.5 per cent). There is scope for greater investments in renewable power generation projects as the Philippine government began allowing full foreign ownership in the sector beginning in October 2022. The current administration is particularly keen on nuclear power, while tax incentives are on offer for power generation facilities that supply renewable energy to the market.

In Vietnam, green projects to address the twin issues of air and water pollution are urgently needed in line with a “circular economy” model of reduced waste and increased eco-friendly inputs, alongside a target to phase out coal power plants before 2050 – providing a huge opening for renewable energy companies. Coal accounts for more than 50 per cent of Vietnam’s energy mix, according to a report.

Developing Southeast Asian countries also benefit greatly from technology and knowledge transfers within the region, a process made easier by the establishment of the ASEAN Economic Community and the Regional Comprehensive Economic Partnership. The challenge for governments, however, is to attract more FDIs and to ensure that these will fund sustainable business activities. When done right, ASEAN economies can cement their status as global growth leaders that benefit their people through reduced CO2 emissions.

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The Maharlika Investment Fund (MIF), signed into law on July 18, 2023, is the Philippine government’s first sovereign wealth fund (SWF) and the country’s attempt to pool investable funds of select government agencies and state-owned corporations. While the global economy is still battling high inflation and high interest rates, the goal of the MIF is to generate returns higher than what individual investment managers of each public entity is currently realizing.

Its timing is rather puzzling as developed economies like the US remain cautious in unwinding the series of interest rate hikes it fired off in 2022 meant to dampen inflation, which at the time peaked at 9.1 per cent while Philippine inflation reached 8.7 per cent. Higher Fed rates drove foreign investments away from developing nations like the Philippines given better yields, a continuing trend as of July 2023.

Implementing rules for the MIF, including the names of the nine-member board of directors that will make investment decisions over the Fund, have yet to be released. What we know so far is that Finance Secretary Benjamin Diokno will be the board chairman while presidents of state lenders, Land Bank and Development Bank of the Philippines, will serve as members. Six remaining board seats will be filled by President Ferdinand Marcos, Jr.

What’s in a name?The World Economic Forum defines SWFs as a national pot of money “often derived from oil or other commodities” that allows countries to diversify investments by putting windfall resources into shares, bonds, property, and other profitable instruments. For MIF, the law states that profits generated will be spent on “high-impact infrastructure and development projects.”

However, this had been met with heavy opposition.

Critics feared the fund could be mismanaged through political interference. Unlike other SWFs straightforwardly named after the country, the name “Maharlika” (Filipino for “nobility”) traces its roots to the political slogan of Marcos’ father, former President Ferdinand Marcos, Sr. To assure the public and dissuade such fears, the President stated that he intends to appoint experienced wealth managers from the private sector to oversee the Fund.

Twin deficitsAs seen in graph 1, the most successful SWFs are mostly funded by surplus government revenues and excessive investment exposures. The Philippines has neither.

Source: The SWF Academy

Philippine officials have argued in favor of MIF by citing Indonesia’s SWF in 2021 – one year into the global COVID-19 outbreak – to illustrate that developing economies do not need windfall revenues to get started. However, Indonesia’s wealth fund fully relies on attracting foreign co-investors for financial resources to support domestic spending priorities, a stark difference from Manila’s strategy.

The MIF, which will start with a PHP 125-billion (about USD 2.3 billion) seed money, can potentially contribute to deepening domestic capital markets as it encourages increased investment activity and may give a timely boost now that foreign demand is virtually absent. Local and global private firms can also invest in MIF once it rolls out bond offerings to meet its PHP 500-billion capital stock, providing another avenue for players to participate in the Philippines’ bustling growth story. A deeper capital market will ease the country’s reliance on foreign borrowings in funding big-ticket infrastructure projects and will reduce borrowing costs, encouraging more foreign businesses to set up shop in the Philippines.

The faster rollout of development projects, particularly in public infrastructure as seen in graph 2, will be a boon for the local business climate should it be realized through MIF. The Philippines intends to keep spending at least 5 per cent of GDP on infrastructure development, and this requires trillions of pesos each year – a challenge to fund amid a persistent budget deficit that’s typical for a developing country. The pandemic has pushed the fiscal gap to 7.3 per cent of GDP (from 3.4 per cent of GDP in 2019) as the country took on more loans to fund emergency health expenses, and paying off these debts adds strain to the already tight public purse.

Source: National Economic and Development Authority

Efficiency is keyMuch of the success of the MIF lies in the hands of its managers and, if executed properly, gives a chance to improve the state’s fundraising ability beyond imposing new taxes.

Of course, this entails a high risk, high reward scenario. Should it succeed, more funds are unlocked for public spending and confidence in the Philippines as an investment destination will certainly improve. But if the fund ends up mismanaged, state corporations providing seed capital are left worse off as their spending and investment activities are disrupted to no avail. This will mainly affect Land Bank (PHP 50 billion), Development Bank (PHP 25 billion), and even the Philippine central bank (PHP 50 billion).

The reputational costs would be hard to bear for a developing country trying to convince international firms to invest onshore – a herculean task at a time of a weak global economy that’s still reeling from the effects of the pandemic and continuing geopolitical concerns, hurting overall business sentiment.

Timing is key for the MIF’s success, with the perfect opportunity being when the Fed embarks on a rate tightening cycle and when inflation is back to acceptable levels abroad. Interest rates might peak soon, which in absolute terms might look good. However, we do note that the Maharlika fund is another example of governments increasingly interfering in the financial markets, the economy, and business in general by creating artificial demand for cash, which has never been healthy in the long run.

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Charter change means going through Congress and holding a national plebiscite to relax a blanket statement in the national charter that currently constricts foreign capital in certain industries like mining, media, and agriculture.

Talks to amend the 1987 Constitution have been revived without the blessing of President Ferdinand Marcos, Jr. The Philippines follows a bicameral Congress wherein the House and Senate must agree on a unified approach to revising the Constitution before it can be put up for a public vote. However, the House of Representatives and the Senate are not on the same page on how to proceed with charter revisions.

These “cha-cha” talks unfolded in the middle of structural changes introduced under Marcos and by his predecessor, former President Rodrigo Duterte, that opened more doors for inbound investments to the Philippines. The country joined the Regional Comprehensive Economic Partnership, the world’s biggest trade bloc, in February which allows for smoother cross-country trade of goods and services at minimal tariffs.

No rush for reformsThe revised Public Service Act opened public transportation like airports and railways as well as telecommunications for fully foreign-owned entities to build and operate. Meanwhile, changes to the Foreign Investment Act and the Retail Trade Liberalization Act allowed international investors to put up domestic enterprises for as low as PHP25 million (about USD500,000) in paid-up capital.

These new laws do away with the old 60-40 equity requirement, where 40% is the maximum cumulative ownership of foreign nationals. Generation of renewable energy may be entirely foreign-owned, while electricity transmission and distribution remain covered by the foreign ownership cap. Republic Act No. 11534 or the Corporate Recovery and Tax Incentives for Enterprises Act likewise reduced the corporate income tax rate from 30% to 25% currently, with a gradual reduction all the way to 20% by 2027 to put the Philippines at par with fellow Southeast Asian countries. Fiscal incentives have also been consolidated under the watch of one central agency, removing inconsistencies in the grant of tax holidays.

These reforms are in nascent stages, having been passed in the middle of COVID-19 restrictions. Lags in implementation by Philippine government agencies indicate that the full impact of these reforms have yet to be realized.

Foreign direct investments (FDI) have rebounded to hit an all-time high in 2021 following a slump during the peak of pandemic-induced lockdowns at USD12 billion in 2021. It slipped to USD9.2 billion in 2022, which analysts attribute to rising global interest rates and inflation. Still, this is higher than the pre-pandemic FDI haul of USD8.7 billion in 2019.

It is against this backdrop where we say there is little incentive to rush Constitutional reforms to relax restrictions on foreign ownership since investors are still trying to digest brand-new policy nudges as they draft their expansion plans. The Philippines remains a bright spot for growth, outpacing most of its peers as well as developed nations which should encourage more investment flows into the economy.

Cha-cha unlikely to passLatest statements from senators indicate that they are unlikely to dance the cha-cha with President Marcos cold to the proposal who believes that the reforms mentioned are more than enough to attract more foreign players.

Efforts to amend the 36-year-old Constitution have all failed under past presidents amid fear that changes might go beyond economic provisions and introduce political maneuvers like longer terms of office for elected officials. It is likely to see the same fate under Marcos, who appears unwilling to use his strong political capital over cha-cha.

Even the biggest Filipino business chambers say there is no longer an urgency to amend the Constitution –– a reform they lobbied for in recent years –– given new laws and regulations that have addressed impediments to additional investments and job creation. The Makati Business Club, one of the most prominent leagues of corporate executives, said a protracted debate on charter change could force foreign firms to hold out on investment decisions as they wait for political stability rather than encourage additional equity placements in the economy.

Cha-cha talks are therefore political noise investors should cut through.

Bigger challenges aheadThe high cost of doing business remains the biggest concern of current and prospective investors in the country, worsened by elevated inflation globally. High power costs, lacking infrastructure, and red tape are among the deterrents to more investment flows. The Philippines ranked seventh out of 10 ASEAN states in the World Bank’s Doing Business 2020 report, only faring better than Cambodia, Lao PDR, and Myanmar. This trend is mirrored by net foreign direct investments received by countries in the region.

High inflation, which hit 8.7% before trending slower in March 2023, has led to higher borrowing rates as the Philippine central bank sought to temper price spikes and match tightening moves by the US Federal Reserve. Higher Fed rates are blamed for a sizeable dip in FDI inflows towards developing Asia in the first few months of 2023 – net flows to the Philippines plunged by 45.7% while Vietnam saw a 16.3 drop year-on-year – but these declines are likely short-lived. Further, this high interest rate environment is unlikely to trigger a global economic crisis, despite some fears triggered by recent isolated incidents of bank fallouts.

More than US borrowing rates, investors will remain on the lookout for encouraging signs of growth in every country. In the Philippines, there are new pockets for investments created under the new administration as the government expands big-ticket infrastructure to more public-private partnerships, alongside plans to relax the Build-Operate-Transfer law to make it easier for foreign contractors to do business in the country.

Years after the pandemic, there is much capital swirling around the global economy and the Philippines is in a good position to capture these flows, with or without pro-business Constitutional tweaks. The Philippines is well on track to sustain above-7% annual growth in the years to come. We continue to believe that Developing Asia, including the Philippines, are centers of global growth and investors should not hesitate to take part in it.

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This is Lundgreen’s Investor Insights’ new podcast where we talk about the whys and hows on our views of the global financial markets in light of today’s trends.

For this episode, our founding CEO, Peter Lundgreen, talks about green energy as a megatrend and goes into one young green tech company, MASH Makes.

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Brazilian President Luiz Inacio Lula da Silva has been attacking the independence and autonomy of the Banco Central do Brasil (BCB) amid the persistently high inflation. Lula said the current level of Brazil’s key policy rate at 13.75 percent was too high and the inflation target of 3.25 percent too low, hinting at a mismatch in the monetary policy.

The policy rate is defined by the Monetary Policy Committee (Copom), which is currently led by BCB Governor Roberto Campos Neto, an appointee of Lula’s predecessor Jair Bolsonaro. Inflation targets are set by the National Monetary Council (CMN), which is composed of Neto, Finance Minister Fernando Haddad, and Minister of Planning Simone Tebet.

Lula’s verbal attacks towards Neto and the central bank led to concerns regarding monetary policy autonomy, which aggravated the existing uncertainty regarding the new government’s fiscal rule and triggered nervousness among investors.

The inflation expectation is currently that consumer prices will rise at an even faster rate. Copom signaled in its most recent meeting that it might not be able to cut interest rates in 2023. In a simulation with stable interest rates over the entire relevant horizon, inflation projections stand at 5.7 percent for 2023 and 3.0 percent for 2024.

Like some other countries, Brazil resorted to expansionary fiscal and monetary policies during the COVID-19 pandemic to prop up the economy and provide resources to the most vulnerable households.

Due to the country’s previous periods of high inflation, the BCB was therefore quick to diagnose the inflationary global environment and was one of the first central banks in the world to tighten its monetary policy. The Selic, or Brazil’s federal funds’ rate, soared from 2 percent to 13.75 percent between February 2021 and August 2022. During this period the inflation peaked at 12.13 percent in April 2022 and has since decelerated to 5.6 percent in February 2023, although still well above the full-year target of 3.25 percent.

BCB’s independence under threatAlthough there is no room at present for expansionary policy amid inflation pressures, Lula and the Workers’ Party insist on inducing economic growth through public investments and strong government intervention in Brazil’s economy. However, the current macroeconomic scenario is different from Lula’s two previous presidential terms. His party’s strategy clashes directly with the BCB’s objectives: inflation control instead requires economic slowdown, higher unemployment, and lower credit availability through higher borrowing rates.

Lula is though discussing an interesting point as the current cycle of monetary tightening is the most dramatic in more than a decade. The policy rate went from a record low to a six-year high in just 18 months. The real interest rate, which discounts inflation from the key rate, is around 7.5 percent which is among the highest in the world. Meanwhile, other nations grapple with negative real interest rates amid surging inflation. This illustrates the severity of Brazil’s current tightening cycle and suggests that President Lula is right to be worried about its impact on economic activity.

The investors get nervous when Lula and his allies coerce the central bank governor into cutting the interest rate through public statements as well as street protests, alongside a call to raise the full-year inflation target to justify his demand for rate cuts. This combative approach against the BCB raises concerns about political interference in monetary policy decisions, which violates the central bank’s need for independence to correctly manage the monetary sector. In a country with a fragile fiscal framework and a long history of elevated inflation as Brazil, keeping prices under control is paramount.

Brazil is not aloneInvestors remember that a Brazilian government earlier tried to interfere in monetary policy. In 2011, former President Dilma Rousseff took the same approach towards the BCB and, succumbing to political pressure, the monetary policy committee voted to cut interest rates even though market expectations pointed to inflation remaining above target for one more year. After the BCB started the monetary easing cycle in September, the market expectation for inflation two years ahead de-anchored and continued to trend above the central bank target in succeeding years.

The same approach was observed in Turkey. President Recep Tayyip Erdogan had been very hostile towards the high interest rates set by the Turkish central bank and instructed its governor to cut the policy rate, even when market expectations for inflation for the next two years remained well beyond official targets. After several frustrated attempts to interfere in monetary policy, Erdogan sacked the central bank governor in 2019 and later fired two other governors until he finally had a rate cut in September 2021. While interest rates fell, inflation expectations rose dramatically since then. As shown in graph one Turkey’s inflation remains at 50.5 percent as of March 2023, easing from a peak of 85.5 percent in October 2022.

Impact on financial marketsIt is unlikely that Lula will succeed in forcing the policy rate down with his rhetoric. The central bank is committed to keeping interest rates at a restrictive level as long as it is needed, and it will not hesitate to resume the tightening cycle if the inflation path does not go as expected. This scenario implies sustained political noise and market volatility.

Before the October 2022 elections, the Focus Market Readout, a survey conducted by the BCB among market analysts, indicated that the rate cut cycle could begin in June 2023 to bring the Selic down to 8 percent by end-2024. As shown in graph two, after the first three months of Lula’s government, market participants expect that the key interest rate can only be reduced by September onwards and that the Selic will be at 10 percent by the end of next year – a much slower pace compared to previous expectations.

Evidence suggests that Lula’s government will rely on higher tax collections to increase public expenditures. If so, inflation expectations and interest rates are expected to remain high, and investors should be underweighted towards Brazil.

This assessment we are ready to change swiftly. As Brazilian interest rates are at historic highs, any news that translates into a fiscally responsible environment could trigger a move into Brazilian assets again.

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A lively discussion about artificial intelligence has flourished again, including the future of artificial intelligence (AI). The reason is, of course, the launch of ChatGPT in November last year, where the dream is that it can produce the text that you wish. It is only natural that such a revolution gives rise to discussions, and investors are wondering whether new investment opportunities arise, also in China.

In the middle of the new storm, I think it is important to remember how broad-based AI already is, but now, the very big factor is “generative AI”, with ChatGPT as the profound development.

ChatGPT is not directly available in China, but of course, there are Chinese competitors on the way. And when something booms in China, well, it goes fast. It is the movement from what is called AI 1.0 to AI 2.0, where the four “AI dragons” – SenseTime, Megvii, CloudWalk, and Yitu – so far have dominated AI 1.0 completely, but with independent platforms.

AI growth in ChinaAI 2.0 will be thought of as a common platform, and everyone wants to participate in the new trend. Wang Huiwen, one of the co-founders of Meituan has hastily founded a company to participate in the AI 2.0 battle, and he believes that his newly founded company is worth USD 200 million, even before the first team of employees is finally hired. But if one can attract investors at this valuation of the company, then this is the price.

Source: Newszoo

The reason why AI 2.0 hypes differently than its predecessor is the vision that the open AI platform will become as dominant as, for example, Windows and Android operating systems. The development is interesting for several reasons, including that China was quite late in moving AI forward. The government-sponsored think-tank “China Academy of Information and Communications Technology” estimates that there are currently 4,227 companies in China that are developing AI software. Graph one is from another statistic, but it gives an impression of the geographical distribution of companies within the sector in China.

In absolute terms, this is a large number, but it amounts to 16 per cent of the global number of companies within this business segment, and thus, around the same as China’s share of global GDP. I see this as an indicator that there is still a lot of room for the sector to grow in China. And if one looks at the absolute size of the market, such as the number of smartphone users, China is the world’s largest (graph two). Right now, the challenge is of a more usual nature, such as the AI companies starting to feel a shortage of programmers and developers.

Source: Newszoo

Directions within the AI spaceAs mentioned, AI is quite broad-based, so where do I see the opportunities for investors within the world of different AI directions? Good question. Some investors consistently choose to invest in business areas that have proven their worth and make money. Here, the return possibilities are smaller, but the investor can expect a positive return. This investor might choose to look in the direction of AI within industrial robots, linguistic AI, HR, and design.

An area that almost seems old is mobility with self-driving trucks, and later on, cars. But even here, one can feel how complex the real world is. Many expected it was just about developing a self-driving car that allows passengers to simply sit in the car and watch a streamed movie on the iPad. It turned out to be a more difficult process than thought. However, I still give mobility AI attention because, if it succeeds, it will be a positive quantum leap that can change the everyday lives of billions of people. This usually means that even a small investment can grow very large – that is if it succeeds.

The next step is what some collectively refer to as Web3, which is now booming in China. Under that hat, my main focus is on “generative AI” i.e. ChatGPT, and then metaverse, which is an independent AI direction. At the company Meta, probably still better known as Facebook, the belief in metaverse was so strong that it was one of several reasons behind its new name. If I were to point to the possibility of a new megatrend, I still see the biggest opportunities within the metaverse. The short popular explanation is that in a metaverse world, one can, for example, create an avatar of themselves and, in that way, socialise with others on social media. There is still a long way to go, but I think one can describe how to technically reach the goal. The last time I looked into it, there were approximately 30 listed software companies in China alone which are engaged in the development of metaverse software, so there is every opportunity to buy a lot.

Though the hype in China right now is, as described, in generative AI, where ChatGPT-like software is considered the new gold. My reservation is that the challenges are partly similar to AI for mobility where the software has to replicate some complex functions of the human brain. It is, for example, to anticipate previously unknown combinations and use intuition, abstract thinking, and common sense. It seems like a challenge, which might be very good to know as a human being, after all. My doubt lies there, which is why I do not share the current hype, but a gold-digging mood like China currently is experiencing is always fascinating because it leads to something – either the gold or the failure.

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Officially, France had a lucky day on Friday, 28th April. They were helped by the classic trick in communications, namely that bad news is best announced late on a Friday when everyone is in a hurry towards the weekend.

On that day, France’s credit rating was lowered from AA to AA- by the credit rating agency, Fitch. At Fitch, they chose, very graciously, to bring the news late that Friday. That’s probably the only good thing to say about that story, as seen from a French point of view.

Fitch emphasized that the French budget deficit will probably grow again this year, to minus five per cent. In addition, economic growth is weak, and Fitch assessed that the French economy was generally weaker than its peer countries.

In addition, there was a lot of focus on President Macron’s political situation, with the very long-lasting unrest about lifting the retirement age from 62 to 64 years being the focal point. The unrest on the streets was due to the fact that the law was implemented using the so-called Article 49.3, meaning the law has been implemented without a vote in the parliament.

Putting perspective on the changeThe French Finance Minister Bruno La Maire actually commented on the rating downgrade, so it has received some attention. He argued that Fitch does not account the recently implemented pension reform with a sufficiently positive effect when it comes to the long-term budget improvement, that the reform will yield. Furthermore, the finance minister considers Fitch as pessimists.

As for the pessimists, I am sorry to say that, on behalf of France, I also belong to that group, at least when the discussion is about the country’s economy and the country as an investment destination. Some of the arguments that Fitch highlights, I think, are very serious, and even partly unusual.

The unusual thing is that the politically challenging situation for President Macron is given so much weight in the credit downgrade of an AA-rated Western European country – I think that should be noted.

Since President Macron took up his first term as president, there has been political work towards increasing the retirement age, which now became 2 years higher, from 62 to 64 years.

Gradually, many governments in Western countries call such steps a “reform”, but from my professional point of view, I would categorize the increased retirement age as a change, perhaps a major change, but no more than that.

The last major reform I can point to in Europe over the past decades is from approximately 10 years ago when the British government, with David Cameron as Prime Minister, implemented dramatic cuts in public spending, except in spending on the health sector. The savings were so profound that there was no money for the Navy to order aircrafts for the aircraft carriers that were being built. It sounds dramatic, and it was, but that’s how much it took to significantly improve the British government budget.

Since then, it is my assessment that no comprehensive economic reforms have been carried out in any European country. And I believe that the British example is an excellent measure of how big changes are needed before changes become real reforms.

I think that puts France’s political challenges into perspective, because as mentioned, the ongoing street unrest in France is now included in a credit rating, and that has perspectives.

Assessment of France’s credit ratingThe more direct consequence is of course the next steps for France’s credit rating. My assessment is that France must simply go through completely different reforms and savings to avoid further steps down the credit rating ladder.

France has had a public budget deficit for decades. As mentioned, Fitch estimates that the situation will worsen to a budget deficit of minus five per cent of GDP again this year.

Source: INSEE, France

Once upon a time, back in 2004, France had a few months of trade surplus. Graph two shows France’s trade balance including the overseas territories, but one can adjust the statistics so France had a few months of surplus in mid-2004, if one absolutely wants to find some sunshine.

The truth is that there are notoriously and structurally internal and external imbalances in the French economy, and there is no political solution to the problem. These are the kinds of challenges that credit rating agencies are usually interested in. In my view, this is enough to expect further downgrades of the country’s creditworthiness.

Source: INSEE, France

The general assumption is that approximately 14 per cent of France’s population lives below the poverty line, determined according to French conditions of living. It is thus one of the steepest increases in Europe within the past years, and when one considers that economic reforms hurt before they get better, yes, there is also the prospect of even more unrest. This means that this new factor in the credit assessment will probably not disappear immediately either.

Of course, such prospects do not change my assessment that investors should underweight Europe, especially the Eurozone, in the investment portfolio. My consideration is about the speed of the credit downgrades of, for example France, is increasing. At the same time, I expect a number of Emerging Market countries to get a higher credit rating – yes, the world continues to change rapidly.

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This is Lundgreen’s Investor Insights’ new podcast where we talk about the whys and hows on our views of the global financial markets in light of today’s trends.

This episode, founding CEO Peter Lundgreen picks up from where we left off and talks about 2023 and the return of emerging markets.

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On the Wednesday before Easter, there came an Easter egg in the basket for the German economy. In February, the factory orders jumped to a 4.8 percent growth compared to January, as graph one shows. This was much higher than the expected increase of 0.3 percent for February. This kind of figure undeniably gives hope for a positive spring for the German economy, and it is possible to push in that direction if hard work is put into the project and the right decisions are taken.

It should be mentioned that the monthly factory orders traditionally fluctuate quite a lot. The increase in January was adjusted down to plus 0.5 percent, and a good bet is that the upbeat figure in February will also be adjusted down.

Anyway, even if these adjustments are subtracted, I note that the factory orders during the last three months have shown a positive development. It follows suit with the important IFO index where optimism among German companies also has shown progress in recent months.

Source: Statistisches Bundesamt, Germany

Difficulty of adding more Easter eggsAhead of 2023, many European (including German) business leaders expressed great uncertainty about their expectations for this year which we are now well into. I have never agreed with the bleak view of 2023, especially because a large part of the global economy will experience economic progress to a greater or lesser extent this year. Though, in the global picture, my biggest concern is precisely Europe, and clearly, including Germany.

For Germany to surprise with a positive economic spring, more Easter eggs would have been needed in the basket, but this is exactly where the difficulties become obvious. Sometimes, it feels like many people are tired of hearing about inflation, which I understand very well. But one cannot hide from the problem, which applies to private households, investors, companies, etc.

On that front in Germany, the bad news is, that the development is actually worsening instead of mitigating. Graph two shows the development of the overall price inflation in Germany where one can recognize some of the energy price increases as an explanation for the high inflation. It is partly an explanation that has been valid since inflation started to skyrocket but the core reality is now looking grimmer.

The core inflation, also shown in graph two, is rising every month which was the only development that should have been avoided. Putting it quite bluntly, and unfortunately also harshly, for every month the core inflation increases, the risk of increased instability in the economy and in society grows.

Increases in core inflation really put pressure on households and force companies to pass on price increases – it is unhealthy cost-push inflation that is very difficult to get under control.

Source: Statistisches Bundesamt, Germany

Correcting inflationPerhaps the biggest challenge in combating inflation is actually who is going to bring inflation down. Another unpleasantness is of course the economic slowdown that combating inflation almost inevitably will mean.

I basically argue that economic history shows those who created inflation must acknowledge what they have caused, search back to the original roots of the inflation, and subsequently change these conditions.

Expressed more operationally, it is my position that the majority of inflation in the Western economies can be explained by public overspending, such as the economic stimulus due to the Covid-19 crisis.

The correction — and thus, the economic cure — is to take the steam out of public consumption and fiscal stimulus. The right solution package also includes seizing the economy after the slowdown that comes and having a plan to get the economy back on track after a possible downturn.

That is why I thought it was very interesting that the German government decided to hold a large-scale coalition meeting on 2nd April. It was necessary as the disagreements within the government are so big that the current government is as dysfunctional as the previous government.

I will by no means downplay the importance of the work with the climate challenges, which also took up the full meeting time that most of the following day had to be included as well. The marathon negotiations confirmed the planned expansion of the German highway network, and an agreement was reached to provide subsidies for new forms of heating in private homes.

For the German economy, private households, business enterprises, and investors, I say it would have been fantastic if the same politicians had spent time on how they will roll back inflation. But unfortunately, that did not happen, and therefore my assessment remains that Germany is one of the countries that still should be underweighted in the investment portfolios.

It may seem like a negative assessment. But my position is actually that not so many additional initiatives are needed to get more Easter eggs in the German economic basket because my assessment of the global economy is fundamentally reasonably optimistic. For one like the German economy, it is largely about correcting a range of conditions, and thus exploiting the global economic progress that exists after all. That possibility has once again been put on hold, and inflation will rage in Germany instead.

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If one imagines a huge dam, the water in the agitated lake is typically completely calm, but one can still imagine the destructive forces that will be unleashed if the dam breaks. If you are below the dam in the gorge or the valley, the impression becomes even more monumental.

In the same place, one finds fear that the water will suddenly begin to trickle forward through a small hole in the dam. If one does nothing, the hole will undoubtedly grow dangerously large, and therefore, the famous solution of sticking a finger in the hole might be the way to go. If there are more holes, it can hold as long as there are enough fingers. Right now, that picture is very reminiscent of what is going on in the banking sector in some countries, but maybe it’s just a few cracks in Switzerland and the US – or should all the world’s investors fear that the dam will break completely?

I fully understand that this risk is being discussed. There is no doubt that the significant interest rate changes last year – in whole or in part – are behind the problems for the banks that have been closed or forced to merge within a short time.

Therefore, speculation inevitably arises as to whether more banks are suffering from the “interest rate risk disease”. Consider how the European Central Bank has pumped large amounts of liquidity into the financial system at zero percent in interest so European banks could buy up Southern European government bonds with long maturities and weak creditworthiness – basically, the same thing that SVB in California tried to do.

A casino like betAllow me to start in the most conservative stronghold for money: Switzerland. I don’t think I’m giving much away by mentioning that many in the financial market over the last 20 years have noticed the several speculative and marginal businesses that the major Swiss bank Credit Suisse was involved in. It’s almost given that at a time of extreme volatility in the financial markets, a bank or two would fail when they are so stressed all the time.

It is always easier to be wise about other people’s companies than one’s own store; the experience with SVB adds to this in retrospect. One thing is how the company culture has been handled at SVB and where the commercial focus has been. Based on a number of serious media reports, it has been made clear that there was also a direct parallel between the increase in interest rate speculation and the increase in the salary level for the bank’s management.

The bank had a significant deposit surplus, which yielded zero percent in return. It was decided to place this liquidity in bonds, so an additional income could be created via the higher yield from the bonds. This went well for a long period, and every time the bank needed to increase earnings, the bond portfolio was moved further out on the yield curve to increase the yield return. It also meant that, at the same time, the interest rate risk was increased. So, when long-term interest rates in the US suddenly rose quickly and violently, the bond portfolio ended up showing such a large loss that SVB tilted.

A few other niche and regional banks have gotten into trouble in the US in a similar way, but in SVB’s case, I think it is quite clear that they tried to increase the bank’s earnings through pure speculation which turned out to look like bets in a casino.

The dam still holdsAs it is all about banks in Europe and the US, I can’t see the justification for calling it a global banking crisis. There is no systemic similarity between the banks in question apart from the fact that the respective managements have pushed the banks into unacceptable risks. Furthermore, the banking sector in Asia is doing quite well, and therefore, I do not see the global aspect in the challenges either. If one finally wants to compare the global financial crisis in 2008 to 2009, then I would rather look at the differences – back then, it really was a global crisis, and it was bitterly hard.

Source: Federal Housing Finance Agency, USA

Right now, the situation is quite different, and that is why I am currently not worried about a global banking crisis, or to put it another way, the dam is not collapsing. But this does not mean that the credit market is risk-free again. The US central bank, in particular, will continue to provoke a reaction in the American economy so inflation comes down to a controlled area again. The central bank obviously has raised interest rates. I also expect that, in a number of economies, there will be an increasing shortage of liquidity. I could well imagine this situation lasting until mid-2024, which will be a nuisance, not least for commercial companies.

One open question that I continue to pay particular attention to is how much the US real estate market will be affected by the monetary tightening. Right now, house prices are staying at a stable level (graph one), which is important in relation to whether the concern about a banking crisis in the US increases further.

Source: U.S. Census Bureau, USA

It seems that it is only the construction activity that is slowing down (graph two), so I therefore also continue to expect that the IT sector and the construction sector will be the two major sectors to drag down activity in the US. With this, I still have the same assessment as before – that the dam holds, the glass is more than half full, and the US will experience a recession in certain sectors – but overall, the country will be free of a recession.

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My expectation for the council meeting on 16th March in the European Central Bank (ECB) is clear that the central bank will raise interest rates by 50 basis points, but it will not be a surprise either. If one listens to the statements of various members of the Governing Council, as well as the guidance to the financial market that ECB President Lagarde has given, then an interest rate increase should be expected among most investors. The interesting question is what the ECB chooses to do in the following months.

In the search for insight to answer this question, the press conference will be very interesting, and the ECB will probably consider its words very carefully. I expect the ECB to reiterate that they will fight inflation and take more steps if necessary. If the central bank does not ensure this, then many market participants will view the ECB as weak, and there is no reason to believe that this will happen.

However, it will also surprise me very much if the ECB directly announces that it will continue at the same pace at the next planned monetary policy meeting, which is on 4th May. In my view, the most likely outcome of the press conference on 16th March is that it leaves the financial markets in a kind of indecisive no man’s land. Probably with an indication that the arrow is still pointing up for the interest rate direction at the ECB, but no more than that either.

A split councilI am often critical in my assessment of the ECB, but this time it is not my intention to give the impression of a hesitant central bank, but there will be two good reasons why the ECB is very balanced in its statements. The first reason is that there is quite a long time until the next monetary policy meeting in May. Therefore, it is natural to use the timeframe to observe whether the previous interest rate increases have had any effect on the economy.

The second reason is one that I consider to be political. The majority of the ECB’s governing council are still so-called “doves”, which means that they prefer an interest rate level on the low side and a monetary policy that is not too tight. An excellent example is from 8th March when the head of the Italian central bank, Ignazio Visco, issued a warning, and he also has a vote when the ECB rate is set.

Ignazio Visco sent a direct warning to the “hawks” in the governing council who argue for a tight monetary policy. It is in line with Italian members of parliament who, since the fourth quarter of last year, have been dissatisfied with the ECB’s interest rate increases.

Many economists, and participants in the financial market in general, will probably find it irresponsible if the ECB does not raise interest rates further. But the worst thing that could happen to the ECB’s credibility is if the majority in the ECB governing council decides not to let themselves be dominated by the hawks, and thus, decide not to raise interest rates.

I think the risk of such a “palace revolution” is very low right now, but the fact that the decision-makers in the governing council express themselves so divergently is remarkable. This shows that there is a growing disagreement internally among the decision-makers. Therefore, it is probably fine to have a sort of break for political reasons, and I estimate that this is also a reason why the statements on 16th March will be very balanced.

Doubling interest ratesThere has been very strong marking at the top ECB level for a long time, and it is in full public view, which is worth noticing. There is no doubt that the “hawks” in the ECB have felt held down for a long time, particularly Germany and the Netherlands. Since the middle of last year, the two leading countries have regained monetary freedom by once again talking about interest rate increases.

Source: The European Central Bank, Frankfurt, Germany

The Dutch central bank chief, Klaas Knot, was very specific in an interview in the Financial Times on 26th December last year when the ECB, as a Christmas gift to investors, previously raised interest rates on 21st December. In the interview, Knot said that the ECB had just moved into the second half of the interest rate cycle and that he could see it peaking this summer (this year).

Any prediction can be adjusted over time according to developments, but it looks like a doubling of the interest rate as it was on 21st December – that it is very close to 5 percent for lending at the ECB (graph one), and thus 4.50 percent for deposits. I can safely say that it is above the current market expectations, and will probably disturb the European stock markets if the development goes that far. But what I give even more focus on is whether the yield curve will continue to invert. Will it become even steeper with the high end of the curve in the one- to two-year maturity (graph two)?

Source FRED, Fed St. Louis, USA

It expresses that investors believe inflation will, at some point, fall sharply, and an inverse yield curve usually expresses a market expectation of a coming recession. It will probably come, but regardless, I would put my money on Knot’s “double down” on interest rates, as the most likely scenario for the next 3 to 4 months.

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Welcome to Lundgreen’s Investor Insights’ new podcast where we talk about the whys and hows on our views of the global financial markets in light of today’s trends.

To commemorate this inaugural episode, our host is joined by none other than Peter Lundgreen, the Founding CEO of Lundgreen’s Capital. In this episode, they talk about what happened in the financial markets in 2022 and what we can look forward to in 2023.

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Not without reason, many Europeans perceive the current situation as a crisis, and it obviously runs so deep that it seems global – but it is not.

The other day, I received an invitation to participate in a large conference from a very well-known Danish organisation, and I was naturally happy to receive the invitation. The invite began with the statement that “the global crisis has now hit Denmark”, which I think is very telling about how the global economy is perceived in Europe right now, but I perceive the world somewhat differently.

Stock markets around the world are still up by 7 to 10 percent for this year, which by no means is bad, and the increase has so far been maintained. It reveals a certain strength in the financial markets, but in many of the conversations I have with investors and business leaders from Europe, it is characteristic that people still do not dare to believe that the good will last; they believe on the contrary, actually.

The most obvious thing to me is that many positive developments in the financial markets, including the stock markets, have not yet been taken into account. So, what happens if stock markets rise another 5 to 7 percent?

My immediate answer is that even then, investors will not be ahead of the curve in buying back the shares they sold last year. This continued bias in the financial markets alone is a strong argument for me to maintain the recommendation from last October to increase risk in the investment portfolio. However, the global crisis has an even greater weight – the global crisis that simply is no global crisis.

Assessing the glass?My assessment of the global outlook shortened down to a paragraph has, if anything, also improved slightly. Asia represents 40 percent of the world’s total GDP (in 2030, it will be 50 percent), which this year will grow by approximately 5 percent. Concerning Latin America, the outlook is mixed, but I have become more positive about the continent’s largest economy, Brazil, as the newly elected president Lula de Silva has not surprised the financial market negatively. China’s reopening probably means a greater import of raw materials from Brazil.

I remain comfortable with the world’s largest economy, the US, as long as housing prices do not fall by more than 5 percent further from the current level, which is slightly more positive than I have previously assessed the US.

Source: FRED, Fed St.Louis, USA

Europe is left with, in reality, a series of self-created crises piling up and with no prospect of them being resolved. For me, that assessment is not new but a repetition. From a European point of view, it may well feel like a global crisis, but it is equivalent to making a national weather forecast on the basis of what one observes by looking out the window. On the contrary, my assessment is that the world is moving forward.

These two assessments alone – that investors are still currently caught on the negative footing while the markets remain slightly bullish and the fact that the global economy as a whole is moving forward again – is enough for me to consider the glass more than half full.

Unfortunately, the biggest unknown factor, globally, also origin from Europe, namely Russia’s war against Ukraine. Back during the autumn, the development showed continuous good news about Ukrainian advances and a Russian weakness, but the news flow has changed lately, and it could become a serious threat to the continued positive development in the stock markets.

For realpolitik reasons, the West cannot have a situation where Russia will get some sort of victory over Ukraine. Therefore, the conflict is moving towards a battle between realpolitik and madness. If the current reports are to be believed, then the risk is that Eastern Ukraine can become a real battlefield with up to several hundred thousand fallen. The world is not ready for that, and it will further dampen all activity throughout Europe, both private consumption and investments. Of course, it will also be negative for the stock markets in general, and the potential for this absolutely terrible scenario is what I currently consider to constitute the greatest threat to the predominantly positive global outlook.

Filling up the glassIn my view, the factor that will once again drive the world economy further forward is private consumption. Now, not entirely by coincidence, I have selected two graphs that fit my predominantly positive assessment, but the argumentation is not entirely beside the point. As it can be seen from graph one, joy is returning to American consumers with great speed. Increasing private consumption in the US, which is a simple and incredibly important factor in the world’s largest economy, can counter a lot of other negative developments.

Source: Reserve Bank of India, India

The good news is that it is not only in the US where consumers see life in a brighter light. This applies very widely in Asia, where graph two shows a convincing development in India. The same applies in many other Asian countries, such as the Philippines, Indonesia, Malaysia, Thailand, and more. One country I have not mentioned is China, where consumers still view the outlook as more modest than usual. It is one of the Chinese government’s major tasks to create a policy that brings confidence back to consumers. Otherwise, China’s GDP is will not grow at the desired rate, so this is a crank, along with the war in Ukraine and house prices in the US, if the glass needs to be filled up more.

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Since the big sell-off in the Chinese stock market in October last year, stock prices have risen sharply, which naturally is starting to attract attention.

I do not know whether the investors have taken advantage of the Year of the Rabbit that officially started on 22nd January in China. However, there has clearly been a change in the attitude towards the Chinese stock market, and right now, the relationship between the US and China is also changing.

In Chinese astrology, the rabbit is considered a wise, cultured, and creative animal. These are virtues that will generally pave the way for a year of progress, including for the stock market. For some investors in China, this will matter. For the majority of investors both in and out of China, it is probably primarily the classic elements behind the movements in the stock markets that are of greatest importance, and something is cooking now.

The bulls are back in the Chinese stock marketPart of the story is a look back to mid-October last year when the Chinese Communist Party held its congress. In reality, nothing unexpected happened; the rhetoric concerning Taiwan was practically unchanged, President Xi was approved for a third term, and there was nothing new about the Covid-19 policy. On the latter subject, there was little hope of a remark from President Xi that would have indicated more relaxed Covid-19 regulations. It did not come, and thus, everything was politically status quo, but that was not the case among foreign equity investors.

The reaction in the stock market outside of China was a historically large sell-off in Chinese stocks. It immediately appeared that some international investors were surprised that President Xi would continue as party chairman and president, even though it had been prepared for years. Despite that, international investors sold even more of the remaining Chinese stocks. A few years ago, there was also a big sell-off where certain asset managers stated that China was “uninvestable” and that they would never return. In my best estimation, a significant proportion of international capital funds are now underweighted in Chinese stocks, and that situation alone can have a major impact on the price development of China’s stock market 2 to 3 months into the Year of the Rabbit.

Source: National Bureau of Statistics of China, China

The renewed sale in October last year meant that, for example, the HSCEI index plunged by approximately 12 percent in the second half of October. The decline meant that we had shares in the portfolio of our mutual fund trading at a P/E value (price/earnings) close to one despite it being well-functioning and profitable companies.

Chinese investors used the decline to buy in heavily, and some local investors even hoped that international investors would sell off the last holdings of shares so they could also be bought cheaply. Since the end of October, the HSCEI index has gone up by 48 percent, which naturally is starting to attract attention.

Many asset managers are measured against a benchmark that quite naturally contains Chinese stocks, and in some portfolios, that return is already lacking. This in itself is an interesting market situation, and at the same time, the political relations with the US are improving, and moreover, a belief in economic progress is spreading again in China.

Anticipating good beginningsSo, does this mean that all is well in China and the Year of the Rabbit offers nothing but sunshine? I cannot point to a country in this world where “everything is fine.” Unfortunately, one has to set slightly lower expectations, but the question is always how much has already been factored into the prices. In the case of China, it even applies that a number of investors are completely out of the market. Here, the question is how much the stock markets must rise before these investors give up and buy in again.

The general growth picture for Asia is around 5 percent of GDP growth this year, which also applies to China. Under the current global conditions, it’s not that bad at all, and it will provide a macroeconomic tailwind, but there are rain clouds that will first need to drift away in China. The country has to go through the current period with Covid-19, though I support the general opinion that at the start of the second quarter, the Covid-19 wave will be reduced.

Source: National Bureau of Statistics of China, China

At the same time, I also expect the development in both graphs one and two to show signs of improvement. Hence, companies get the opportunity to expand while consumers’ mood rises again. Regarding the retail sales in December, it should be mentioned that despite the negative annual development, the figure was significantly better than expected, so perhaps progress in retail sales is already on its way. If I am to become really optimistic about China’s economy, then exactly the retail sales need to improve more.

The start of the Year of the Rabbit hopefully offers other good developments. US Secretary of State Antony Blinken will visit China at the beginning of February. In mid-January, US Treasury Secretary Janet Yellen and Chinese Vice Premier Liu He met in Zurich where they agreed on mutual visits during this year. These are new tones — not wild, but more welcoming — which I expect investors will perceive as positive.

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Inflation continues to impact many of the movements in the financial markets around the world, but the speed of the coming retreat in inflation rates is also of decisive importance. The Britons will, of course, be delighted if the inflation rate starts to drop again. In October, inflation reached 11.1 percent, as graph one shows;...

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The overall financial market is still strongly focused on several negative developments in many economies around the world, but investors must always be aware when everyone in the financial markets is looking in the same direction. Throughout the last six months, I have argued that the financial markets are experiencing a huge correction. The correction...

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The European Central Bank is behind in hiking interest rates, though more work might arise since spontaneous energy crises can also create unexpected hyperinflation periods during the rest of this decade. The annual symposium for central bankers in Jackson Hole, Wyoming, USA, was back in full force over the weekend of 26th to 28th August....

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Italy’s current credit rating has been set to “negative outlook” by Moody’s, and though it may still take a while before it formally becomes a significant change, investors should be quicker to react. The Covid-19 crisis has been a burden on government debt in many countries and has resulted to government debt as percentage of...

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The financial markets are currently experiencing highly dramatic interest rate increases from the US central bank Fed, though without panic thus far, but in the background is a continuously developing global macroeconomic split. The financial markets are nothing less than historically exciting at the moment. The primary driving force of which, is the world’s most...

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All economic growth forecasts are now being lowered once again, which will naturally increase uncertainties in the financial markets. On Tuesday, 19th April, it became as official as it could be, that the global economy is facing a significant decline in growth rates. The International Monetary Fund (IMF) announced its revised expectations for the GDP...

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Despite the intensive discussion about the dominance of social media, my view is that they will continue to grow, also in China, where the metaverse is now really gaining momentum. If one is looking for insight into the latest technological developments, it is a good idea to focus on the United States, typically Silicon Valley,...

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The new German government has finally come into place and is now starting its work, this is unlikely to cause the financial markets to shudder right now, but some southern European countries are probably more tense.

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There has been some fear for a major correction in the stock market throughout 2021, but the real risk could look different.

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Wall Street relaxedly received the news of the next monetary tightening in U.S., but equity investors could very well search for new opportunities, thus also taking new risks.

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There has been some fear for a major correction in the stock market throughout 2021, but the real risk could look different.

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The post A mighty megatrend returns appeared first on Lundgreens Capital | UK.

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The Covid-19 crisis caused a significant drop in income for many households around the world, but at some point, the journey towards the middle class will revert again – probably in even more countries than before. Prior to the Covid-19 crisis, the growth of households in the income segment that can be described as the...

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The Covid-19 crisis caused a significant drop in income for many households around the world, but at some point, the journey towards the middle class will revert again - probably in even more countries than before.

The post A mighty megatrend returns appeared first on Lundgreens Capital | UK.

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A leading central bank must stay firm when dark clouds cast shadows over the financial markets. On the other hand, it is a common expectation that the central banks must be ahead of the curve, and act prematurely, if needed. It underlines that the demands are very often ambitious in the financial markets.

For a central bank, it means figuring out how to change the monetary policy to act on coming changes in the economy, and to stay put if the economic changes are just temporary.

This seems challenging, and I would say that it is, though it is just one of the many challenges that investors and other participants in the financial markets are faced with every day. One of the extremely important parties in the market is The European Central Bank (ECB), where my impression is that they very often feel challenged – it might be showtime again.

In terms of the monetary policy, the assignment for the ECB is to manage the inflation to be close to, but not above two pct. It does not have to be the easiest task, as part of the swings in the inflation is out of a central bank’s control. In the financial markets, it is widely accepted that a central bank does not react to all kinds of changes in inflation, even big moves can be ignored by the central banks, which is the right decision every now and then.

One current reason for a spike in the inflation is the so-called “base effects”. As the inflation dropped heavily last year, then it almost certain that it will increase the following year, as prices converge back to a normal level. This argument was already brought into the inflation discussion initiated by the former US Treasury Secretary Lawrence Summers in the beginning of this year.

I belonged to the fraction that argued that the steep rise in the US inflation would fade back to normal level, mainly because of the base effects. Lawrence argued that new inflation impulses, like rising energy prices, could take over and prolong the high-inflation period.

My own concern was predominately wage inflation in the service sector in several economies around the world, as the labour market proved to be tight. A wage inflation can truly spread to other parts of the economy and can stay on for long periods. I regard this risk as rising, as the labour shortage is obvious, but suddenly, energy prices are also shooting up. Oil price is at its highest in the past three years, though the rise is after all, modest. Instead, gas and electricity prices are exploding, and emerging bottlenecks in the global supply chain are starting to cause inflation.

Since February, the inflation drivers have become more widespread, and they seem to be more powerful. The US central bank has started to communicate with the financial markets about some sort of tighter monetary policy at some point, not particularly hawkish, but at least changing the rhetoric.

It seems natural, as the whole world is on the move again, partially away from the Covid-19 crisis, and back towards a normal activity level. Even in Europe, consumers are currently showing more strength, like in France (graph one).

I am still not overly afraid of an upward inflation spiral, but inflation is back, and for now, I expect it to remain at a naturally higher level than it has been the last couple of years. An absolute understandable market reaction is to offload bonds, so the yield curve moves up. This time, I could imagine that the yields stay higher for good, as the move in the global economy is visible, which means this time, the German 10-year government yield will probably move up in positive territory again (graph two). Given the changed inflation and growth outlook, it is natural if central banks choose to hike rates, precisely to be ahead of the curve.

Though these observations are an illusion, the ECB says. At a central bank conference on the 28th September, the ECB President Lagarde explained that the current spike in the European inflation is mainly caused by the prior mentioned base effects. This should be the argument for staying put with refinancing rates at a negative and very unhealthy low level, due to what Lagarde said at the conference.

Years prior to Covid-19, the inflation in the Eurozone was swinging around the desired two pct., which gave the ECB plenty of room to increase the ECB deposit rates, in my view the rate should have been at three pct. I keep my long-lasting view that the ECB keeps the rates extremely low to facilitate cheap refinancing for the Southern European economies. The whole financial market is preparing itself for a higher inflation during this period, and this is reflected via rising yield curves. Only, the ECB is not moving, so I argue that the ECB is once again behind the curve, but it is inevitable that the rate hike will come one day. I can only share my experience that investors should avoid investment destinations where the central bank is behind the curve.

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