Each January, I look forward to the top ten trends of the coming year, an exercise that takes on even greater significance as we near the end of a decade. The mega trends of one decade usually falter in the next. The 2010s have been a great one for the American economy and markets, but the top trends of 2019 reflect the passing of that era.
1. America Has Peaked: In the 1950s, global investors were hot for Europe. The big theme of the 1960s was the big American companies called the Nifty-Fifty, the 70s was the age of oil and other commodities, the 80s was the decade of 'Rising Japan'. By the 1990s, the markets had rediscovered America, this time with a focus on Silicon Valley and tech. The 2000s brought the big emerging markets labeled 'BRICS' into the spotlight. The 2010s have been another American decade, and saw the US market triple in value while the rest of the world's stock markets on average did little in dollar terms.
2018 could well be remembered as the year America peaked. Relative to the rest of the world, the US market hit highs not seen since records begin a century ago. Now, the correction that began in the US in October may signal not only a turn in the market, but the end of a halcyon age for America. The US market is expensive, the dollar is expensive, many US corporations are deep in debt, and the Fed has ended the era of easy money that had propped up the economy since the great recession of 2008.
2. Rise of Anti-Bubbles: Any bubble will generate in its wake a series of anti-bubbles: a string of countries, companies and markets that are ignored not because they are inherently weak but because they fall outside the current focus of market hype. All the attention lavished on America and tech has generated numerous anti-bubbles, depressing the stock market in solid emerging economies from Indonesia to Poland, and the stock price of companies in any industry outside tech.
One simple indicator of anti-bubbles: when any one company has grown to dwarf the entire market in large countries or regions, you know hype is distorting the flow of money. At its height in October, Apple had a market value of more than $1 trillion, higher than three of the major Southeast Asian stock markets combined (Indonesia, Malaysia and the Philippines) and triple that of Eastern Europe (Poland, the Czech Republic and Hungary.)
The Indian stock market did not fall quite far enough off the radar of global investors to qualify as an anti-bubble in 2018, but it too was overshadowed by the tech craze. The combined valued of Facebook, Amazon, Apple, Netflix and Google climbed above $3.5 trillion, dwarfing the entire Indian market and its economy.
Such is the focus on tech names like Apple that its stock is still trading $6 billion a day – six times more than the total trading volume in the three largest markets of Southeast Asia. But since tech began to crack, there have been signs that investors are rediscovering forgotten countries with the markets of Philippines and Indonesia up in dollar terms since October even as the US market is down 10 per cent from its peak since then. The anti-bubbles may lift in 2019.
3. The New Debt Cloud: The idea that the world might learn a lesson from the global financial crisis has been belied by the run up in debts since then. Total global debt fell a bit after 2008 but has since continued its upward march to 320 percent of global GDP, up from 200 percent in 2000. The big borrowers include the US government and corporations in China. US firms have leveraged up too. Among companies listed on the S&P 500 index, debt has tripled in this decade to one and a half times annual earnings – near the historic peaks reached during the recessions of the early 1990s and 2000s.
These debt clouds put an invisible ceiling on how high and fast central banks can normalize interest rates. The markets had expected the Federal Reserve to follow through on plans to raise rates in 2019, but as it became clear that any further hikes would slow the already weakening global economy and trigger turmoil in the markets, those expectations have receded of late. Too many corporations are deep in debt and in no position to handle higher interest payments for central banks to keep raising rates in 2019. Particularly when doing so would also burden their increasingly indebted governments. And what happens with global interest rates has a direct bearing on Indian interest rates. If global interest can't increase much, then neither can Indian interest rates.
4. Fiscal Indiscipline Everywhere: Every boom creates the seeds of its own destruction, and the excesses that could end the American decade are now in view. If the US economic expansion lasts through August, it will be the longest on record, and while it is not unusual to see corporations running up debt during a boom like this, it is unusual to see the government follow suit. Yet it has. The US government deficit is now around 4 percent of GDP, and has never been higher outside the immediate aftermath of a recession or war.
And the rest of the world is following a similar path, with the average fiscal deficit estimated at 3 percent in 2019 from 2.25 percent in 2015. Populist pressures on governments to spend more are growing everywhere, including in India. With the consolidated fiscal deficit of the centre and state governments at 6.5 percent of GDP, India doesn't have much room to spend more, but as calls for relief for distressed farmers mount in the run up to the coming national election, the government will be under pressure to run up the deficit anyway.
5. India's Single Engine Economy: One price of democracy in India is that politicians cater to voters by lavishing them with all manner of government giveaways from subsidized fuel to free TVs and appliances. The government is left with much less to invest in roads and other infrastructure that increase productivity. China has followed the opposite growth model, with its government investing three times more than the Indian government in infrastructure and other capital expenditure. That is the major reason why the Chinese economy has grown so much faster.
India has evolved into a single engine economy, driven by consumption, which has accounted for 70 percent of economic growth in recent years. And more and more Indians are financing their purchases of cars and other consumer goods with debt, driving up household debt from 10 percent of GDP in 2010 to 15 percent today. That's not a worrisome level or a major concern for 2019, but the single engine is increasingly fueled by borrowed money, and that is not a sustainable trend in the long run.
6. The Winners in an Age of Deglobalization: The great recession of 2008 marked the start of an era of deglobalization in terms of the flow of immigrants, money, and trade across borders. Trade had risen steadily from 30 percent of global GDP in 1970 to more than 60 percent until the shock of the 2008 downturn turned many countries inward. As they started erecting new tariff and non-tariff barriers by the hundreds, global trade to GDP has fallen back to 56 percent, and the general consensus is that the whole world is worse off as a result.
But as trade flows fell, they also began to shift. China's share of global manufacturing exports peaked at more than 17 percent in 2014 and began to fall, particularly in cheap, labor intensive sectors like apparel. China's loss has benefitted those nations with the most advantageous labor and regulatory conditions, which unfortunately does not include India. Though it was not a big loser, India saw its share of global apparel exports increase a measly two-tenths of a percentage point between 2010 and 2017. The big winners included Bangladesh and especially Vietnam, which saw its share increase by 6 percent to more than 14 percent over the same period. These shifts are likely to continue in 2019 with the trade tensions between the US and China accelerating the shift from China. An increasing number of global companies are also talking about diversifying their supply chains and setting up factories outside of China in places such as Vietnam, Malaysia and other southeast Asian nations.
7. Anti-Establishment Populists Roll On: The recent rebellion against free trade and immigration has been driven by anti-establishment politicians, most prominently US President and self-avowed "Tariff Man" Donald Trump, but including like-minded populists all over the world. They are still on a roll. According to an index tracked by Deutsche Bank, support for populists of the right and left peaked at 35 percent of the popular vote in developed democracies during the early years of World War II, then hovered around 10 percent for decades. In 2016, it began to spike back up above 30 percent, where it remains today. Even where the populists don't become presidents, they have put heat on mainstream politicians to back away from open support for free trade. This pressure is not likely to abate in 2019.
8. Techlash: One reason tech had such a great run over the last decade is that it was running without the weight of regulation on its shoulders. In the United States, for example, there are 215,000 regulations covering the manufacturing industries, 128,000 in finance, and 99,000 in telecoms. Tech faces a relatively paltry 27,000 – but that is poised to change. Over the last year, the US Congress has hauled in the leaders of Facebook, Google, Netflix and others to warn them that if they don't start policing internet content, Congress will step in and do it for them. China's tech firms are also facing new scrutiny from a bureaucracy that used to focus less on regulating their business behavior than on protecting them from US competitors.
In an environment where regulators left tech firms free to lay their golden eggs, they came to dominate global markets. Of the world's 10 largest companies by market cap, seven are in tech. In an age of more tech regulation, this kind of dominance will be much harder to sustain.
9. The Next Big Trade Battle: Though they wouldn't say so publicly, many European politicians privately applaud Trump's campaign to force Beijing to stop "stealing" western technology and banning foreign tech firms from competing directly in China. While the US still maintains a clear lead in fields like semi-conductor manufacturing, China already has more operational robots, supercomputers, and has moved much more rapidly than any country toward creating a cashless society, driven by mobile payment systems.
China has created an alternate internet where people search through Baidu, follow social media on WeChat, hail rides on Didi and pay their bills on Alipay. Some of this progress is genuine innovation, but much has been copied or cultivated in a market sealed from outside competition. The next trade battles are taking shaping around the question of how far Beijing can continue building tech prowess by banning competitors or borrowing their best ideas.
10. King Dollar No More: From being one of the cheapest currencies in the world at the beginning of this decade, the US dollar is now one of the most expensive. A hotel room or a cup of coffee costs more in New York than most other major global cities. Since 1973, when the Bretton Woods system of fixed exchange rates gave way to floating exchange rates, the value of the dollar has floated in a range within 15 percent above or below its long term average. Right now, it is above the upper end of that range for only the second time, which means that the next move for the dollar is likely to be a step down. A step down for the dollar is usually a positive sign for emerging markets like India, and just might mark a definitive end to the American decade.
(Ruchir Sharma is a global investor and an author, including of the forthcoming book: Democracy on the Road: A 25-Year Journey of India)
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