EXPORT, INSURANCE AND LONG TERM FINANCE

10.2

Geopolitical predictions for 2021

2021 is likely to witness emphasis on multilateralism, an acceleration of coupled with rising military and economic powers that feel ongoing geopolitical the need to bolster their own shifts, while some defense capabilities in light emerging markets may of rising emerging security experience significant challenges, could ultimately lead growth tailwinds to the regionalisation of power of centres, or least continue the As we all look towards the year evolution towards that end. ahead and try and put the global recession of 2020 behind us, I wanted to outline The Hartford’s Political experts anticipate the perspective for the year ahead. US refocusing on traditional In respect to geopolitics we alliances, reposition troops in SHAILESH KUMAR anticipate that the shift towards South Korea and Germany, and Head of Country, Credit and the regionalisation of power reaffirming its commitment to Economic Research NATO. However, this reversion to a The Hartford centers will continue, and potentially accelerate. Meanwhile, “robust” US engagement strategy on the economic front, many is unlikely to result in a hardline industry experts expect emerging approach towards China, at least markets to witness a strong year. not initially. Many believe that the US will not want a confrontational Geopolitics – Regionalisation to or contentious relationship with accelerate Beijing at the start of a new administration. This does not One of the key forces driving imply an outright reversal of the geopolitics in 2021 will likely stem past administration’s policies with from a change in US leadership respect to China, as prior policies as this could yield significant affecting tariffs and restrictions shifts on the foreign policy front. on investments and China’s Specifically, it is anticipated tech sector are likely to stay. that the year ahead, and But it does mean a potentially thereafter, will be hallmarked less bellicose approach (at by an increased US emphasis least publically), and instead on multilateralism. This means one with more dialogue at the less solo proclamations on the sub-executive level (there are US’s intentions, fewer surprises indications that members of the and quick decisions, advanced new US cabinet may function as telegraphing of major policy backdoor diplomats with China). changes, and working with The shift in tone alone could also traditional allies to promote be interpreted by some as the foreign policy goals, all while US opting to be “softer” on China attempting to bridge divides than what was seen in recent with emerging partners. An years.

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However, over time expect any in Europe to work with China on own capabilities, recognising that “softer” US approach towards select issues, could then mean the world’s “approach” towards China to give way to a more that sections of Asia including China is not binary. aggressive posture. This is Vietnam, India, Taiwan, Australia, particularly true since China is and to a lesser extent Philippines Further examples of this largely a bipartisan issue in the and Japan, question the world’s regionalisation could be seen US, with concerns ranging from commitment to “containing” in the MENA region. Turkey has security, to intellectual property, Beijing, given that China is a recently shifted its foreign policy business, trade, investments, preeminent geopolitical and seeking closer defense ties with and labour standards. But while security concern for these Russia, despite Ankara being a the US shifts from a hard line, to nations. As a consequence, these member of NATO. This is partly soft line, and back to a medium countries may be incentivised driven by Turkey’s desire for line approach with China, there to deepen their regional strategic dominance in the will of course be other nations cooperation, while concurrently region, which would otherwise that choose to court Chinese bolstering their own defence come at the expense of Saudi engagement and proximity to capabilities. Amongst these, Arabia. Both nations are US allies, Beijing. These include Pakistan, India and Australia are best but ties with each could well Iran, and Venezuela. Then there positioned to present a credible slide in the coming years. This in are countries that might not military deterrence (given their turn could embolden Turkey and be allies or partners of China, existing capabilities), whereas Saudi Arabia to further bolster but will continue to seek areas Japan could continue down the their own military capacity as of cooperation, including the path of revising its constitutional they seek to be the power centres European Union, Turkey, Russia, commitment to pacifism as the of the region. The bottom line is and some nations in Africa. nation strives to build robust that in each region, the potential military offensive capabilities for power centres to emerge An initial soft approach towards down the road. What this could accelerate in the coming China in the US (which gives framework represents, in short, year. way to an eventual harder line), is a regionalisation of power coupled with more willingness structures as countries build their

Credit - IMF: World Economic Outlook 2021

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A big year for emerging markets In the emerging markets, by hold sooner, fiscal spending may comparison, it seems that be curtailed sooner. Meanwhile, On the economic front, economic shutdowns are less of an issue we are already seeing indications advisers no longer anticipate a going forward. There is not time and hearing about the potential V-Shaped economic recovery to go into all the numbers here, for inflation to pick up amongst in the first part of 2021 and but generally the rate of death these nations. Part of this may be have a slightly more sanguine per 100,000 in many emerging attributed to supply dislocations, outlook than others. Of course, markets is significantly lower coupled with demand surging experts hope to be wrong, and than the developed world. This, faster than anticipated, coupled although growth could pick up amongst other factors, leads to with rising commodity prices. in the second half of the year less support for future shutdowns In response, it’s possible that resulting in strong annualised in these markets, and in turn some emerging market central data due to base effects, we are implies that emerging markets banks start to tighten rates in not assuming it to be a given. But could see an economic recovery 2021, adding upward pressure on we could see a division between sooner than other areas. their yields while strengthening large emerging markets and the their local currencies. These developed world. There are a few The differing economic outlooks trends, coupled with a weaker reasons for this: could also result in differing dollar, could result in increased policy responses. If the developed capital flow to emerging markets First, in the developed world, the world fails to see a V-shape as investors seek yield, thereby era of COVID-19 shutdowns will recovery materialise, or even strengthening emerging market not necessarily cease at the start some derivation of it, then we currencies and assets. of this year, especially outside can anticipate US fiscal and the US, due to possible delays in monetary policy to remain Essentially, emerging markets vaccine distribution and rising accommodative for longer. We could be poised to outperform case levels. Second, shutdown already know that the Fed will in 2021, particularly those that related headwinds place even be on hold and keep rates at are large, have diverse sources more pressure on policy support, 0 percent for the next two or contributing towards growth and which gives rise to policy misstep three years, per their comments revenue, and have favorable related risks. If countries are slow in September. However, there debt metrics. In fact, our team to approve fiscal stimulus, or the is plenty they can do on the has a set of models that create distribution of it, it could present quantitative easing front, and scores for countries on a host of an additional drag on growth. could potentially continue or perils, and our macroeconomic Third, policy missteps could also even ramp up purchases and scores for select emerging manifest in the form of asset security maturities over the next markets are showing the largest bubbles – ongoing monetary year. This could be particularly numerical improvements when stimulus has forced investors into true as Treasury security supply using 2021 economic forecasts. risk assets, which have already increases given the rise in This indicates the potential for inflated prices. This in turn could aggregate US debt from the macroeconomic stability in these result in increased asset price 2020 stimulus packages. This in names. The risk to this though is if volatility when/if prices come turn could suppress yields, at there is a bursting of asset prices down and the bubbles burst. least in the front end (we could in the developed world, for the Fourth, when/if economic growth see steeper yield curves). Higher reasons noted above. Inevitably, begins, fiscal stimulus support government spending, loose this would affect emerging may be eased and we could start fiscal and monetary policy, low markets too. to see a wave of bankruptcies for front end yields, and increased entities that no longer have fiscal central bank balance sheet With that said, many expect, support. Accordingly, it is possible expansion could naturally be and hope, that investors do that the economic recovery dollar negative, providing support not paint all emerging markets remains choppy with a few fits to select emerging currencies with the same brush. The larger, and starts, which could take us all and assets. diversified, and fiscally strong the way through 2021. emerging markets with ample In emerging markets, especially funding sources will likely witness those where/if the recovery takes greater capital flow and thus

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asset appreciation, even in cases be more discerning of actual This then means that we where they have high nominal fundamentals, at least more so could see a division between debt levels (i.e. Brazil). However, than what we saw in the summer emerging markets too, with smaller markets that have of 2020 when just about every some significantly outperforming their economies concentrated asset class in every emerging others. In other words, while in one or two sectors, and market saw demand. we are positive on emerging are highly indebted, may risk markets, fundamentals matter, having investors pass them Increasing indebtedness is a and some will potentially perform over. The latter group of nations growing issue, which could better than the rest. could see their refinancing continue into 2021, and we expect costs increase, and further investors to recognise it as such, expose them to sovereign thereby investing mainly in the headwinds. Accordingly, we stronger emerging markets that anticipate investors to likely exhibit strong fundamentals.

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