China’s Growth Targets Need to End

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It’s no easy task for China’s leadership to govern a country of 1.4 billion. It’s a burden that no leader of any other advanced economy faces.

Included in Beijing’s overall challenges are its domestic and economic policies, both of which are intertwined.  Sufficient growth must be maintained when a key objective of the Communist Party and Beijing’s leadership is maintaining social order and delivering for the country’s population a better quality of life.  For much of China’s population a better quality of life translates today to a good job and increasing income. Longer-term it includes a better environment including reduced pollution.

It’s difficult for many in the western world to understand Beijing’s pressure to create more than 10 million new urban jobs annually.  Last year, Beijing succeeded and 13 million new urban jobs were created, which I view as a great economic success despite a year of lower GDP growth.  To put this monumental task in perspective, the United States only needs to create 1.3 million new jobs annually.

All aspects of continuing to evolve China’s economy from one that is centrally planned to a market economy with Chinese characteristics is continuing to be a major challenge for Beijing.

The headwinds that China’s economy faces are many. Most of us like to think that Beijing’s leadership has significant control over its own economic destiny.  To a large extent this is wishful thinking, not based on what China’s leadership is able to impact, but more importantly given on what its leadership is unable to impact. Premier Li Keqiang has stated that China has more economic tools available if the “new normal” of reduced growth impacts job growth and income, but Beijing can’t impact foreign demand for China’s manufactured goods.

It’s clear that China’s three decades of growth in excess of 10 percent are long gone. Logical thinking results in the conclusion that China’s economy couldn’t continue to grow at the above 10 percent rate indefinitely, but many of us believed or wanted to believe that the economy  would.

This becomes even more clear when one understands the basic “law of large numbers,” which applies not only to companies, but also to nations. Specifically, the larger an economy grows, the harder it becomes to keep growing at that same rate.  For example, if China’s economy grows at 7 percent in 2015, it is actually generating more additional economic output than its economy did in 2007 when China’s growth rate was 14 percent.  If you think about it, it’s easy to comprehend. But if most of China’s population are fixated on growth of less than 10 percent as being unacceptable, it’s a challenge for the leadership in Beijing to convince them otherwise.

China’s 7 percent growth target for 2015, which was confirmed when the National People’s Congress met in March, should have been viewed internationally as a very positive announcement.  But it wasn’t. Instead the news was generally reported in the context of comparing the 7 percent target to the years of growth in excess of 10 percent.  For the most part, the global media reported the 7 percent growth target as a failure, and viewed the reduced growth target as evidence that there was something structurally wrong with China’s economy.

One conclusion is apparent.  Many foreigners and governments want China to fail, not understanding that both their own country and China can’t both thrive at the same time. For example, China doesn’t have to fail for the U.S. economy to flourish. Instead, what should have been highlighted by the international media was how strong China’s projected growth for this year is compared to the projected growth of both advanced economies and other emerging market economies.

It is an eye-opener to compare China’s targeted growth rate with that of the world and the United States. The International Monetary Fund (IMF) has projected global growth for this year at 3.5 percent, less than half the rate of China.

The U.S. economy is projected to grow at a rate of 3.6 percent this year. Yes, China’s projected growth rate is almost double that of America’s.  It’s true that the U.S. is an advanced economy, one that is not expected to grow at as great a rate as an emerging economy, but America’s growth rate was reported as a major accomplishment, while China’s growth rate of double that of the U.S. was reported as a failure.

The headwinds that China’s economy faces are many and clear.  Over time, growth is a function of labor, capital and productivity.  When all three increase, as they did in China for over three decades, growth was above 10 percent.  But, China’s working age population peaked in 2012; investment also peaked at 49 percent of GDP. a percentage few countries have ever seen;,and China’s technological gap compared to advanced economies is narrower than it has been in the past, resulting in lower growth from productivity gains.

But let’s look at some good news regarding China’s economy.  China’s average disposable income outpaced the country’s GDP last year, increasing 8 percent to approximately  $3245.  China also created 13 million new urban jobs in 2014. Unemployment is at a somewhat reasonable rate of 5.1 percent.

As long as China’s leadership is able to keep income and employment levels up, Beijing’s leaders should have the political ability to proceed with some of the more painful reforms that are generally acknowledged as necessary, but that Beijing avoided implementing last year.

China’s economic miracle was driven by the growth of the country’s export industries. If there is one major factor since the 2008 global financial crisis that impacted China’s growth rate, it has been a weak export sector. Since 2008, the global economy has sputtered, reducing imports of Chinese manufactured goods. Decreased demand for China’s manufactured goods are the primary reason that the “new normal” targeted growth rate for 2015 is 7 percent. Exports, which have been major drivers of China’s growth are difficult for Beijing to impact. The tumble in price of the euro currency and the yen, are other factors that  Beijing can’t control, but which also have a significant impact on China’s exports and therefore its economy and growth rate.

As China’s economy continues to evolve to more of a market economy, one increasingly based on private enterprise and entrepreneurship, the country’s sustainable growth is increasingly less dependent  on infrastructure development, spending and investment by local governments, and state-owned-enterprises.  While these can all be easily impacted by Beijing policies and will “deliver growth,” most will not lead to long-term sustainable growth.

All of this leads me to China’s annual growth targets.   Growth targets may be appropriate in a Soviet style planned economy, but they’re not appropriate for today’s China, as the country moves further toward its goal of a market economy with Chinese characteristics.

China’s practice of targeting growth rates is disadvantageous and should be ended. Stating a growth target establishes a measuring stick that becomes problematic. Targeting growth puts pressure on Beijing to “deliver growth” at all cost. The growth measuring stick also puts pressure on local government leaders and management of state-owned-enterprises to deliver growth at all costs. Annual growth targets establish unrealistic expectations for China’s economy from entrepreneurs and most importantly and of great concern to Beijing, the hundreds of millions of China’s workers.

Last year, in 2014, China missed its growth target by a tenth of one percentage point. This became an embarrassment for Beijing and also for local authorities who felt pressured to achieve their annual numbers. A result was  increased local debt, and the continued operation of many inefficient and polluting smokestack industrial operations that rightly should have been closed.

If targeted growth is not met, it also creates anxiety for China’s population, which can negatively impact consumer spending, increasingly important as a driver of China’s economic growth.

What is the alternative? Instead of a growth target, Beijing should instead focus on job growth and income. More importantly China’s leadership should implement long-term strategies to deliver more and better jobs, grow income and provide a better environment for China’s population of 1.4 billion.  This is definitely a difficult task, but one that is easier for Beijing to achieve if it isn’t focused on publicly-announced GDP growth targets.

Author: Jeffrey Friedland

Jeffrey Friedland is CEO of the financial services firm Friedland Global Capital, which provides corporate finance and strategic advisory services to entrepreneurial companies in emerging and frontier markets.

He first traveled to China in 1988, opened an office in China in 2003 and continues to make frequent visits to the Asia-Pacific region, including China. He is an author, speaker and thought leader on emerging and frontier markets, and the global economy.

Mr.Friedland has been the chief executive officer and a director of a NASDAQ listed financial services company, a director of a New York Stock Exchange listed company with all of its business operations in China and chairman of the board of a Frankfurt Stock Exchange listed company with Chinese operations

Mr. Friedland is author of the book, All Roads Lead to China, which is an investor road map to the world’s fastest growing economy, which is available in both print and Amazon Kindle versions.

He has been featured or quoted in numerous publications including the Wall Street Journal, USA Today, the South China Morning Post and Forbes, and is a regular contributor to Money China.

Mr. Friedland has been a frequent speaker at conferences and events throughout North America, Europe and Asia, including speeches to individual and institutional investors on emerging and frontier markets.

Will 2015 Be The Year The Yuan Becomes a Global Reserve Currency?

YuanFor too many years China has not been taken seriously on the global economic stage.  That may change later this year when it’s likely that the global economic order will be shaken up.   For the first time, China’s currency, the yuan, could be endorsed by the International Monetary Fund (IMF) alongside the U.S. dollar,  the euro and other major currencies as a global reserve currency.

Assuming that this actually happens, it’s something that is long overdue.  A little over thirty years ago, in 1978, Deng Xiaoping initiated economic reforms that were described at the time as “socialism with Chinese characteristics,” which initiated what has been known as China’s economic miracle.

With a population of 1.36 billion, and a recent historical economic growth rate that exceeded that of all major countries,  it was inevitable that China would win the title of the world’s largest economy. It wasn’t a question of if, but when.  It happened last year when the United States lost the title of the world’s largest economy to China. It was a title that the U.S. held since 1872, for 140 years, when it unseated the United KIngdom as the world’s largest economy.

The Chinese economy is now valued at $17.6 trillion, slightly greater than the $17.4 trillion the IMF has estimated for the United States. By the end of this decade the IMF has projected that China’s economy will be valued at almost $27 billion, 20 percent larger than that of the US, which the IMF is projecting at slightly over $22 billion.

While news of China becoming the world’s largest economy was reported by the Western media, it was only in the headlines for a few days. Few western commentators delved into the implications to analyze what this meant for the future of the United States, China and the global economy.

It’s clear what this means to China and the country’s future.  Many have described this century as China’s century, and becoming the world’s largest economy is key to that becoming a reality.

But Ignored by the western press was the potential impact on the United States.  Today, slightly over 60 percent of all global reserves are held in U.S. dollars.  Many have suggested that this by itself sets the stage for what has been characterized as a “free ride” for the United States.  It has allowed the U.S. Federal Reserve to keep interest rates at near zero, seemingly indefinitely. It has also enabled the Federal Reserve’s printing presses to increase America’s money supply by over $4.5 trillion.

The dollar’s status as the primary global reserve currency has forced foreign governments to hold their reserves in dollars, regardless of whether they wanted to.  It also resulted in U.S. public debt skyrocketing to $17.8 trillion at the end of September. Of this debt, $6.1 trillion or approximately 47 percent was held by foreigners, the largest of which were China which held $1.3 trillion and Japan which held $1.2 trillion.

The role of the U.S. dollar also enabled America’s budget to skyrocket, to a projected $469 billion this year, and as projected by the U.S. Congressional Budget Office to $1 trillion starting in 2022.

Twice-a-decade the IMF conducts a review of the basket of currencies its members can count toward their official reserves. The next review is scheduled for later this year. With China’s economy now the world’s largest, the IMF will discuss whether the yuan should be a global reserve currency alongside currencies including the U.S. dollar, the Japanese yen, the Swiss Franc and the United Kingdom’s pound.  If the IMF allows the recognition of the yuan as a reserve currency, it will accelerate the decline of the U.S. dollar’s dominance in global trade and finance.

To obtain approval from the IMF, China will need to satisfy the IMF”s economic benchmarks and obtain the support of most of the organization’s 187 member countries.

Approval will be partly based on whether the IMF decides that the yuan is “freely usable.” China’s currency may now be able to pass this test, partly due to meeting the other IMF requirement of being a large exporter.

Due to cross-border yuan denominated trade, the proportion of China’s trade that is currently settled in the yuan has risen to about 20 percent, the market for yuan-denominated Dim Sum bonds has grown to almost $73 billion from zero in a little over seven years, and Beijing has also increased foreign access to the country’s financial markets, with agreements to allow the yuan to trade freely in Frankfurt, Hong Kong, Singapore and London.

The U.S. could potentially torpedo the yuan’s becoming a global reserve currency because the change requires somewhere between 70 percent or 85 percent of the vote under the IMF’s bylaws, and the U.S. has 17 percent of the votes.  But politically this would put the U.S at odds with most other countries, including China and other emerging market economies. So, a U.S. veto is unlikely, and I believe that the yuan will obtain approval.

The benefits for China of the yuan becoming a reserve currency are significant. If the yuan is designated a reserve currency it would allow central banks, especially those in developing economies to hold yuan denominated assets, and diversify not only away from the dollar, but the euro, Swiss franc and yen as well.

In fact, the yuan will likely be more widely used in both financial markets and in currency trades than Japan’s yen or the United Kingdom’s pound.

When, not if China’s yuan achieves global reserve currency status, China’s century will have truly begun.   No other economic event will have as much potential impact on the global economic system.

Author: Jeffrey Friedland

Original publication date: January 3, 2015

 Jeffrey Friedland is CEO of the financial services firm Friedland Global Capital, which provides corporate finance and strategic advisory services to entrepreneurial companies in emerging and frontier markets.

He first traveled to China in 1988, opened an office in China in 2003 and continues to make frequent visits to the Asia-Pacific region, including China. He is an author, speaker and thought leader on emerging and frontier markets, and the global economy.

Mr.Friedland has been the chief executive officer and a director of a NASDAQ listed financial services company and a director of a New York Stock Exchange listed company with all of its business operations in China.

He has been featured or quoted in numerous publications including the Wall Street Journal, USA Today, the South China Morning Post and Forbes, and is a regular contributor to the magazine, Money China.

Mr. Friedland has been a frequent speaker at conferences and events throughout North America, Europe and Asia, including speeches to individual and institutional investors on emerging and frontier markets.

Will the New Year Bring a Renewed Interest in Brazil by Global Investors?

Brazil CurrencyThe Global Financial Crisis of 2008 impacted both mature economies and emerging economies. Emerging markets were particularly impacted, as the crisis ushered in an era of reduced interest by global investors in emerging markets.

Today, the continuing military advances by ISIS in Iraq and Syria, a slowdown in China’s growth rate, the global and regional risks from the spread of ebola, and concerns regarding Russia’s increasingly provocative military actions have all contributed to many global investors retrenching. Many are now taking a wait and see attitude regarding investing in emerging markets.

Reduced oil prices have added to global uncertainty and governments that have a high dependence on oil revenues are being severely impacted. But there are beneficiaries of reduced oil prices. Lower oil prices are having a positive impact on consumers. Paying less for fuel and energy enables consumers to have increased disposable incomes, leading to increased spending on consumer goods.  Consumer spending in the U.S., Europe and other mature economies this Christmas season will likely be a beneficiary.

As we enter a new year, global investors can’t ignore Latin America and its population of 588 million for very long. Two countries, Brazil and Mexico dominate Latin America’s economic output.

With the continuing drug wars and corruption monopolizing the news from Mexico, I’m increasingly focused on Brazil, the world’s seventh largest economy.  With a population of over 200 million, and a GDP of over $2.2 trillion, the entire economy of South America is dominated by Brazil.

President Delma Rousseff’s won a narrow victory over Aẻcio Neves, in the tightest Brazilian presidential election ever. There is hope that the narrow lead will cause Rousseff to change the countries economic policies, but many have questioned how willing the new government will be to make the necessary changes.

A positive development is the appointment of Joaquim Levy as Brazil’s new finance minister. Mr Levy received his doctorate in economics from the University of Chicago and has served with the International Monetary Fund and the European Central Bank.

Levy  immediately committed to restoring balance to the country’s struggling public finances. Many view the appointment of Mr. Levy and his economic team as one of the potentially biggest turning points in Brazil’s economy since Ms. Rousseff took office from her predecessor, the immensely popular Luiz Inácio Lula da Silva in 2011. There is hope among many global investors that Levy will enjoy more autonomy from Rousseff’s administration regarding economic policy than previous finance ministers.

My conclusion is that Brazil will once again be on the radar screens of an increasing number of global investors.

Author: Jeffrey Friedland

Jeffrey Friedland is the author of “All Roads Lead to China: An Investor Road Map to the World’s Fastest Growing Economy,” which is available in print and Kindle editions at Amazon and other booksellers.

Mr. Friedland is the CEO of Friedland Global Capital, a firm that assists companies in emerging and frontier markets in achieving their corporate finance objectives including accessing global equity capital. He is also the chairman and CEO of INTIVA Inc., a life sciences firm that enables investors to participate in the growing worldwide cannabis industry.

Colorado’s New Cannabis-Friendly Credit Union – Don’t Crack Open the Champagne Yet

Colorado MarijuanaIt was announced this week that the world’s first financial institution established for the marijuana industry could be up and running by the first of January in Colorado.

Fourth Corner Credit Union was issued a state charter to operate Colorado’s first new credit union in nearly a decade.

This announcement has generated a high-level of euphoria in the cannabis industry both in Colorado and nationally, but it’s not yet time to crack open the champagne.

Two major hurdles remain. First, obtaining deposit insurance from the National Credit Union Administration and then obtaining access to the Federal Reserve System.

Deposit insurance is a necessity for Fourth Corner Credit to accept deposits.

Access to the Federal Reserve System is critical for the credit union to be able to provide checking accounts, issue debit cards and deposit customer checks.

My conclusion is that one can’t assume that Fourth Corner Credit Union be able to obtain deposit insurance nor access to the Fed system.  It’s appropriate to conclude that not all employees and management of the National Credit Union Administration and the Federal Reserve are friendly to the cannabis industry.

Assuming that both deposit insurance and access to the Fed system are obtained, it may still not be time to rejoice. The level of scrutiny and compliance requirements for Fourth Corner Credit for the credit union itself and its customers may be overly burdensome for both.

Author: Jeffrey Friedland

Email: jeffrey@intiva.us

Twitter: @jeff_friedland

Jeffrey Friedland is the author of “All Roads Lead to China: An Investor Road Map to the World’s Fastest Growing Economy,” which is available in print and Kindle editions at Amazon and other booksellers.

Mr. Friedland is the CEO of Friedland Global Capital (www.friedlandcapital.com), a firm that assists companies in emerging and frontier markets in achieving their corporate finance objectives including accessing global equity capital. He is also the chairman and CEO of INTIVA Inc. (www.intiva.us), a life sciences company that enables investors to participate in the growing worldwide cannabis industry.

For Almost Two Centuries the U.S. had the Monroe Doctrine – Now China has its Xi Doctrine

Emerging MarketsJames Monroe was the fifth president of the United States. Under his administration what became known as the Monroe Doctrine was first stated in 1823.  The doctrine became a long-standing tenet of  U.S. foreign policy. It declared that the Western Hemisphere was America’s area of influence.  The premise of the Monroe Doctrine was that further efforts by European nations to colonize or interfere in North or South America would be viewed by the United States as acts of aggression, thereby necessitating American intervention. The establishment of the Monroe Doctrine was a defining moment in U.S. foreign policy.

Turning the clock almost 200 years later, China is aggressively implementing its own form of the Monroe Doctrine, not just for countries with which it shares borders, but extending throughout East Asia, South Asia and even into countries bordering the Indian Ocean.

I’ve named this foreign policy the Xi Doctrine, after China’s president Xi Jinping. Xi is using both China’s economic and military tool kit in what he sees as China’s sphere of influence.

After President Obama’s decision to extricate the U.S. from the disastrous wars in Iraq and Afghanistan, in 2010 the Obama administration initiated what it described as a “pivot to Asia.” America’s pivot to Asia was a change in strategy aimed at bolstering the United States’ defense ties with countries throughout the Asia-Pacific region. While many smaller countries in the region were hopeful that it was in fact a pivot by the U.S. to Asia, privately it was viewed by many governments and leaders in the region as  political rhetoric, one that would have minimal if no impact in the region. China went further, viewing Obama as a weak president, America as a declining global power, and saw the regional power vacuum as an opportunity to assert China’s influence in the region.

Since the announcement of America’s pivot to Asia, China’s has taken what many in the West and in Asia considered to be aggressive actions in the East China and South China Seas, areas in which Beijing maintains it has long-standing, historical claims of sovereignty. Beijing views its actions as defensive. These actions by China have rattled China’s neighbors, including Japan, the Philippines, Indonesia and Vietnam. As China likely anticipated, there was no meaningful response by the United States,  thereby providing Beijing  with a green light to continue to assert its role in the region.

Actions by China’s military in the region are only part of the equation. Perhaps more importantly are China’s economic actions in what Beijing sees as its area of influence.

For the first time since the reforms initiated by Deng Xiaoping in 1978, China’s outbound direct investment will exceed the level of foreign investment.

Beijing announced that for the first nine months of this year that China outbound investment totaled $75 billion, an increase of almost 22 percent over the same period in 2013. While not quite ahead of the amount of foreign investment into China, Zhang Xiangchen, the country’s assistant minister of commerce indicated that based on current trends that outbond direct investment would exceed foreign investment by the end of this year.

With $4 billion in government administered foreign exchange reserves coupled with Beijing’s ability to influence foreign investment by both state-owned-enterprises and local private companies and investors, China is mobilizing its economic toolkit. This is being implemented globally, but most importantly in Asia, it’s sphere of influence.

China’s foreign direct investment is attractive not only to the governments of its direct neighbors, but also to country’s throughout the entire Asia-Pacific and Indian Ocean region.

Infrastructure  investments, including pipelines, roads, rail lines and free trade zones have been openly welcomed by governments from Mongolia on the Northwest, Kazakhstan on the West, Pakistan, to the south, its neighbor Myanmar, and even the small island nation of Sri Lanka, off the southeast coast of India.

This foreign direct investment is a key aspect of President Xi Jinping’s strategy in  implementing Beijing’s “Asia-Pacific Dream.” It provides the economic framework that should boost economic growth and improve infrastructure throughout the region.

With a void of power due a lack of foreign policy by America’s Obama administration, China has to a large extent been successful in convincing leadership of countries in its sphere of influence to forget about the U.S and accept the reality that China is the alpha-power in the region, both economically and militarily. China is now using its economic power as a tool, to what the Xi administration see as a reconfigured Asian order, one centered in Beijing.

China’s economic strategy has been described as being similar to the U.S. Marshall Plan that rebuilt Europe after World War II. Others see it as an effort by China to reinstitute a tributary system through which china dominated East Asia for much of 2000 years.

Neither of these conclusions are incorrect.  China has sought to use its influence in the region through both foreign aid and investment as a way to obtain access to Central Asia’s natural resources, with oil at the top of the list.

The Xi Doctrine encompasses China’s “Silk Road Economic Belt,” which includes a transport corridor connecting the Pacific Ocean to the Baltic region, and linking China and East Asia to South Asia. It also includes what Beijing has described as the “21st Century Maritime Silk Road,” which includes Sri Lanka, Kenya and extends to Greece in Europe.

In May of this year Xi was more direct. He touted a new security concept, indicating that “it is for the people of Asia to run the affairs of Asia, solve the problems of Asia, and uphold the security of Asia.” My conclusion is that this statement was the moral justification for the new Xi Doctrine.

What is the implication of the Xi Doctrine for entrepreneurs and business leaders in China, Asia as well as  global investors?  There is only one conclusion, specifically that this century, which has been called China’s century, will bring tremendous opportunities, and the Xi Doctrine is a confirmation of what the future will bring.

Author: Jeffrey Friedland

Email: jof@friedlandcapital.com

Twitter: @jeff_friedland

Jeffrey Friedland is the author of “All Roads Lead to China: An Investor Road Map to the World’s Fastest Growing Economy,” which is available in print and Kindle editions at Amazon and other booksellers.

Mr. Friedland is the CEO of Friedland Global Capital, a firm that assists companies in emerging and frontier markets in achieving their corporate finance objectives including accessing global equity capital. He is also the chairman and CEO of INTIVA Inc, a life sciences firm that enables investors to participate in the growing worldwide cannabis industry.

The Economies of the Seven Largest Emerging Markets are Now Larger than the G-7

It was inevitable.  On Tuesday the International Monetary Fund released its new World Economic Outlook.  What will be a major shock to many is that the seven largest emerging market economies, consisting of the BRIC countries of Brazil, Russia, India and China, and the MINT countries of Mexico, Indonesia and Turkey now have a combined gross domestic product (GDP) of $37.8 trillion, based on purchasing power parity (PPP). This compares to a GDP of $34.5 trillion for the G-7 countries of Canada, France, Germany, Italy, Japan, the United Kingdom and the United States.

Also, based on purchasing power parity, China’s economy is now the world’s largest, $17.6 trillion compared to $17.4 trillion for the U.S. economy.

As I discussed in my book, All Roads Lead to China, Purchasing Power Parity is the most accurate way to compare standards of livings between countries. It’s a bit confusing, but the basis of PPP is that residents of one country, should be able to buy the same standard of living, at the same cost, as residents of any other country.

Purchasing power parity solves the problem of comparing countries with different standards of living. It recalculates the value of a country’s goods and services as if they are being sold at U.S. prices.

In 1986, The Economist magazine took a whimsical approach in determining whether currencies were at appropriate market levels. The magazine invented their Big Mac Index.

During the summer of 2013, the price of a McDonald’s Big Mac in the United States was approximately $4.37. The same Big Mac cost $2.57 in China. From this example, one can conclude that Chinese consumers do not require as large an income as Americans to have the same standard of living. The bottom line, it costs less to live in China than it does to live in the United States.

The implications of the seven largest emerging economies now surpassing those of the G-7 are clear.  Increasingly the growth engine of the world’s economy will be emerging market countries.  For investors, the emerging markets are where the real opportunities will be over the coming decades.

Author: Jeffrey Friedland

Geopolitical Risk and Investor Opportunities

The world certainly has its share of geopolitical conflicts, from the Ukraine, to Gaza, to Iraq and Syria, to strife in numerous countries in Africa. Have these wars and conflicts impacted investors? The short answer, as strange as it may seem is “not really.” It seems that the global conflicts are having as much impact on stock markets as the winners of Dancing with the Stars.  

The disconnect between geopolitical events and the world’s stock market is greatly pronounced right now. Most global investors seem to be focused on companies themselves, their cash flows and prospects for the future.  Last week, when international news was led by events in the Ukraine and ISIS controlled territory in Iraq and Syria, the S&P 500 broke 2000 for the first time.  

Today’s global investment climate seems to be more focused on geopolitical opportunities than geopolitical risk. It’s easy to look back into recent history and see other events that have led to opportunities, the ending of dictatorships in Latin America in the 1980s that led to the opening up of markets, the end of Maoism that led to the opening of China, and the tearing down of the Berlin Wall that fled to opportunities in the former USSR.

Perhaps today’s global investors have become complacent, and have concluded that the world will continue to have geopolitical conflicts, but that business and making money has to go on.  

Author: Jeffrey O. Friedland