MARKET PERSPECTIVE

By J Mulraj

Dec21-27, 2024

Geopolitical factors influence investor options

Governments in several countries have either toppled or are in turmoil. In Germany, the strongest economy in the EU, Chancellor Olaf Scholz lost a no confidence vote, leading to early elections. In France, the largest but one economy in EU, the Government of PM Michel Barnier fell after failing to get pension reforms passed in the Budget.

The Governments of both Germany and France made a serious error of judgement that led to their fall. As members of NATO, they got pushed by President Biden to support Ukraine in its war with Russia. The only problem was that both countries, as well as other EU nations, depended significantly on cheap Russian energy, efficiently delivered by pipeline, at a low cost. So their decision to  sanction  Russian energy was an insanely immature act, like chopping of their toes instead of getting a pedicure.  For this stupidity they lost their competitive edge, and have now paid the price.

France, though not as dependent as Germany for its energy needs (70% of energy is nuclear)  had an intractable pension fund problem. Because of its demographic profile, their pension scheme was running out of funds, as the number of youth putting money into the fund was reducing, even as the demand for pension benefits, or the draw out of the fund, was increasing. Barnier, like others before him, suggested a modest increase in retirement age, which the French rejected. The French workweek of 35 hours/week was enshrined into law in 2000, and they are now too fond of the good life. Barnier’s suggestion to retire at a later age was met with street protest, and he was ousted.

The German auto industry was its emblem of manufacturing efficiency and design excellence. It has suffered for two main reasons. One was the significantly higher cost of energy, mainly LNG imported from USA and other countries, delivered in expensive cryogenic ships rather than an overland pipeline from Russia, after Scholz foolishly sanctioned Russia’s energy supplies. And the second was the complacency of auto industry leaders in not transitioning fast enough to electric vehicles, or EVs. According to PWC the German auto industry will lose 12% of its workforce by 2030.

The price for the foolish and myopic decisions of the political and corporate leadership is paid by the people. Ukraine, prodded by the collective west who provided weapons and funding, has lost its young men to a senseless war. This loss of its youth reduces the fertility rate,  and so its survival as a society is uncertain.

In essence, the Governments of the collective West, by egging Ukraine into battle by supply of weapons and funds, but not soldiers, outsourced deaths to Ukraine. Just 2 months after the Russian invasion began, both countries had agreed to terms of a ceasefire, negotiated by Turkey’s Erdogan. This agreement  was upended by a thoughtless Boris Johnson, ex PM of UK, encouraged  by Biden to intervene. The deaths and injuries of soldiers since then rest on the conscience, if any, of Boris and Biden. It was the sting of the Bs!

The Government of Syria, engaged in civil conflict for several years, collapsed suddenly when President Bashar al-Assad fled the country. Assad was deprived of support from Hezbollah, who were engaged in the fight in Lebanon, with Israel. The power vacuum created after Assad fled would need to be filled; perhaps by ISIS. ISIS is the militant group that emerged after Saddam Hussein was killed after the US invasion. A resurgence of ISIS or Al Qaeda is of grave concern to investors.

China, which has built the world’s largest capacity for manufacturing goods, is facing the consequences of overcapacity. Its leadership encouraged the realty sector to build houses to accommodate the rural to urban migrants, and built up the world’s largest capacities to manufacture cement and steel, the required inputs.  As per this article of 2023, there are enough unsold apartments in China to house another 3 billion people. This means that the financial problems of the realty sector in China will last for decades. Hence the capacity utilization of feeder industries, notably cement and steel, will remain low, leading to dumping.

China also faces high youth unemployment, causing demotivation and resentment, as a result of the withdrawal of foreign manufacturers, thanks to unfriendly policies. The economic woes, and social displeasure, is, apparently, putting political pressure on Xi Jinping.

What this signifies to investors is that China may not be the engine for global GDP growth, as it used to be, when it was sucking in commodities to build infrastructure. And if Trump raises import tariffs by 60% across the board, as he has threatened to, the resultant drop in global trade can lead the world into recession. One feels, however, that the 60% threat is Trump’s way of demonstrating his art of the deal. The increase in import tariffs will be acceptably lower.

So in several countries there is political chaos and instability. The silver lining is that the polity will be so busy politicking that they won’t interfere in the scientists coming up with brilliant solutions to solve the world’s problems of energy, environment, mobility, medicine and hunger.

Autonomous, or self driving, electric vehicles will provide a cheaper and safer way to travel. Combined with an Uber like on demand, always available, service, it will significantly reduce the demand for individually owned vehicles. As also release huge swathes of land for parking, which will lead to redesigning urban spaces.

The declining growth in productivity, slowing GDP growth, is being addressed by development of humanoid robots.  A humanoid robot costs around USD 20000, and lasts 10 years. It is deployable immediately on birth, unlike a human, which takes over 20 years to enter the workforce, and needs spending on upkeep and education meanwhile. A robot works 24 X 7 X 365, does not take breaks for meals, does not ask for holidays, overtime, wage hikes or bonuses. Does not go on strike. Over a few years the cost of producing one will drop from $20000 drastically. The economic case for humanoid robots is unarguable. The social case is not, as it will replace labour. How the polity will work this out is not clear, but humanoid robots are an idea whose time has come.

Sadly, the political leadership in India is showing, in some areas, a dangerous amount of myopia. My last column mentioned the waste of time, 15 years, it took the Supreme Court to adjudicate the rate of GST (goods and services tax) to be charged on coconut oil. The rate was lower if used as edible oil, and higher if used as hair oil. Goodness gracious! Why should the Supreme Court be involved at all? Is it fiddling even as India burns?

Last week it was the Finance Minister who “clarified” the GST rate for popcorn!! Caramelized popcorn is a sweet, she clarified, which ought to be taxed more than salted popcorn, which is namkeen! Is THIS serious governance or bathos?

Mr Modi, it is high time you clamped down on such a colossal waste of time over non issues like coconut oil or popcorn. Leaders should lead. Not use their time and talent over trivialities. Have you done enough to encourage the development of emerging technologies like autonomous vehicles, humanoid robots, AI, quantum computing, protein folding, nuclear fusion, and others?

If you don’t have leaders who understand such things, obtain the talent. India has plenty. As evidenced by the rise to top positions of global companies like Microsoft, Google, IMB, Adobe, Mastercard and others. America allows individual talent to flourish and drive their companies and innovation forward. It does not tie their hands over inanities like the tax rate on popcorn and coconut oil.

Please observe the fate of other leaders who made errors of judgement. And the consequences for their economies. Stop petty mindedness and bureaucratic myopia before it stops India from becoming an economic leader.

Last week the BSE Sensex ended at 78699  for a weekly  of 658 points.

One hopes that the political transition in America goes smoothly and Trump is able to address the mess left by his predecessor by stanching/reversing the flow of illegal immigrants, negotiating an end to the Ukraine war, and, hopefully the Mid East war, setting US finances in order by cutting wasteful expenditure under DOGE ( department of Government efficiency) and the like.

One hopes that India’s leadership recall their pledge to make Governments smaller, reduce myopic pettiness, stop wasting time over popcorn and coconut oil inanities and start earnestly working towards a future where technological prowess will determine a nation’s success or failure. If they do, Stockmarkets will explode.

Image created by Bing, using AI

Comments may be sent to jmulraj@asiaconverge.com