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15 June 2018

KBL epb charts shifting balance of global economic power 

Private banking group’s 2018 Midyear Investment Perspectives features analysis of long-term outlook for world’s largest economies

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As the balance of global economic power continues to shift from west to east, investors must broaden their horizons. That is the view of Stefan Van Geyt, Group Chief Investment Officer at Luxembourg-headquartered KBL European Private Bankers (KBL epb), which today released its 2018 Midyear Investment Perspectives, covering the long-term outlook for some of the world’s largest economies.

Benefitting from America’s retreat from the global stage and Europe’s inability to forge a common vision of reform, China continues to transform its once sleepy, centrally planned agrarian economy into one driven by manufacturing and, increasingly, domestic services.

The world’s second-largest economy is now opening its financial markets to foreign investment. As Chinese weight in key emerging-market equity indices consequently rises, according to Van Geyt, so will overseas investment flows.

By 2030, if not sooner, China will have overtaken the United States as the world’s largest economy, and India will have become the most populous nation on earth. The pace of Indian reform has been extremely impressive, supporting sustained GDP expansion, which stood at 7.7% in the first quarter of this year. Already a global FinTech hub, India added over 1,000 new tech startups last year alone – placing the country behind only the US and the UK in terms of startup ecosystems.

Back in 2001, when the term “BRIC” was coined, the outlook for Brazil and Russia looked every bit as bright as it does now for India and China – but being a member of that club has proved no guarantee of success, said Van Geyt.

Brazil’s economy grew by an anemic 1% in 2017, its first year of expansion since 2014, while Russia’s heavily energy-dependent economy has suffered from sustained low oil prices, sanctions and a cocktail of cronyism and corruption.

Russian population growth stands at close to zero and R&D expenditure at a paltry 1% of GDP. Today more than ever, the country must reverse those unfavorable demographic trends and diversify its economy away from oil, Van Geyt said.

While Europe stands divided, its two largest economies, Germany and France, both seek to move forward with major domestic reforms.

Thanks to the vibrancy of its Mittelstand and as it continues to invest in digitalization and disruptive technology, Germany is reinventing its economy for a new age. Meanwhile, France’s ambitious president wants to liberalize an economy burdened by suffocating bureaucracy, high taxes and dysfunctional unions. According to Van Geyt, that may ultimately prove far easier said than done.

As it prepares to exit the European Union, the UK faces an array of new trade barriers that could stifle growth. That’s why the country’s post-Brexit strategy depends so heavily on forging new partnerships, especially with the Far East.

The US, too, faces an increasing number of such barriers, nearly all of them of the country’s own making, said Van Geyt. Although the country is currently benefitting from President Trump’s tax cuts – which are prolonging the already very long cycle of economic growth – that has come at the cost of steadily rising debt. Over time, that may limit the country’s ability to invest in key areas such as quantum computing, artificial intelligence and electric vehicle production.

“Markets will inevitably adapt to the inexorable shift in global economic power from west to east,” Van Geyt concluded. “The composition of bond and equity indices will likewise change – forcing investors to broaden their own horizons as they seek opportunities to profit from the new new world order.”