Following an October that witnessed significant downside volatility in financial markets, global equity markets have staged a modest recovery in local currency terms, with the MSCI ACWI up +1.9% to the end of last week (+0.13% in GBP terms). Beyond the short-term gyrations of the past weeks, the 100th anniversary of the Armistice at Compiègne provides us with the opportunity to reflect upon the longer-term market and geopolitical events that drive global returns.
The renowned economist John Maynard Keynes is best known for his work The General Theory of Employment, Interest and Money – written in response to the Great Depression and which gave rise to the economic doctrine of Keynesianism. His earlier and less well-known work, The Economic Consequences of the Peace is (in this author’s opinion) his greater and more prescient work. It outlined the folly of imposing harsh economic sanctions on a defeated Germany to satisfy political aims. This is potentially worth a read by Messrs. Macron and Juncker as they seek to make clear the economic cost of leaving the EU to the UK.
More recently, economists Stephen Broadberry and Mark Harrison of Oxford and Warwick Universities respectively, recently published a collection of papers – The Economics of the Great War: A Centennial Perspective. In this, they further elaborate on the economic parallels between then and now. One of the most interesting points they highlight was how the outcomes of the war depended on each country’s self-sufficiency. Just as the fortunes of the Central Powers were determined by the fact they ran out of food before they ran out of shells, the fortunes of modern economies in a period of rising trade tensions will likely be impacted by their reliance on trade. If we review the OECD data for Imports & Exports as a % of GDP, we find some potentially surprising results. Smaller countries with the most to lose from a slowdown in global trade include Ireland, Belgium and the Netherlands as exports as a percentage of their GDP is greater than 80%. At the G20 level, Germany has the most to lose with exports making up 45% of GDP – while China and the US are some of the world’s most self-sufficient large economies with 20% and 12% respectively. This is interesting in the context of who loses in an environment of slowing or decreasing world trade.
Additional themes explored by Broadberry & Harrison looked at how the war brought about an abrupt end to unfettered migration, increased nationalism in Europe and the large refugee crisis that followed long after 11th November. It is well worth remembering that the issues faced by today’s policymakers are by no means new.
Closer to home, with the noise around the Brexit negotiations reaching a crescendo, it is worthwhile taking a step back and evaluate the underlying structure of the UK economy. Recent Q3 GDP growth came in strong at +0.6%, indeed outpacing that of the economies of France and Germany. Unemployment remains at a record low and, with the avoidance of any turbulence, the Bank of England should begin steadily raising rates. The UK will remain a hub for technology, financial services and biosciences offering plenty of investment opportunities for the medium to long-term investor after this latest European agreement is concluded.