The economic implications would be an increase in fiscal spending against a backdrop of declining revenues. To compensate for the expected shortfall in revenues, tax rates will have to increase alongside an expansion of more types of taxes. A poster of child of such flagrance is in Japan. It recently announced a $2.2trn stimulus packages, 40% of its GDP, that will require the country to issue Yen90trn of government bonds, which is a record level. If we include the government debt due for rollover for this fiscal year, Yen 212 trn worth of debt is coming to the market for financing, widening its fiscal deficit to 14.9% of GDP, a multi-decade high. To put the near 15% deficit spending in perspective, Japan must run a balanced budget while generating 2% pa growth over the next 7 years to normalize its fiscal deficit incurred in 2020. This will be a tall order as the average GDP growth in Japan since 1995 has only been 1.5% pa and it has never run a balanced budget since 2009. Furthermore, as postulated by the Ricardian equivalence theory, the current efforts to stimulate the economy via unsustainable debt-financed government spending will fail as consumers would rather save in expectation of higher taxes and/or are less sanguine of future growth in income. This behavior is evident in post-GFC world. We witnessed US savings rate jumped from the average of 4.6% between 2000-2008 to 13.1% as of Mar 2020. We can draw the same conclusion in Europe and Japan as well. From a portfolio perspective what this trend means the search for income will continue but the challenge is to find reasonable yield in a world where close to $16trn debt are yielding zero or negative yields. There will be clear winners in sectors like healthcare and robotics; areas the team is focusing to build both internal and external expertise.

Wild Beasts. We wrote back in May 2018, The Thucydides Trap, about the risk of US and China falling into the Thucydides trap. Since then, diplomatic wrangling has become more cantankerous. It this author’s opinion neither of these two countries have demonstrated leadership and benevolence in this time of crisis. The recent comments from China’s foreign minister remarking “U.S. political forces are taking hostage of China-U.S. relations, attempting to push the ties to the brink of so-called ‘new Cold War” which was followed by the US Secretary of State declaring that it no longer view HK as autonomous are bellicose statements leading to the inevitable conflict. While many have hoped that relationships between both countries can improve if the current US administration is not re-elected in November, the deterioration in their relationship between both countries did not arise from the Trump’s administration but has been festering since Obama’s strategic “Asia pivot” in 2012. The core of US’s bi-partisan view of China as a strategic competitor and adversary predates the “Asia pivot”. It stems from deep rooted issues such as loss of employment among the middle and lower rungs of its society as firms outsourced to China in droves after China’s ascension to WTO in 2001. As for China, its abhorrence of western powers interference in its domestic affairs including treatment of Muslims in restive Xinjiang province, Hong Kong’s “One country, two systems” and Taiwan’s independence can be traced back to its humiliating loss during the 18th century Opium war. While conflicts are inevitable as an upcoming nation challenges the incumbent’s status quo, it does not mean a war is imminent. As mentioned in his book, Destined for War, Dr Graham Allison cited several occasions the dislodgement of dominance did not lead to war with the US-Soviet narrative as the most relevant. The presence of nuclear arsenal in both countries set the condition of “mutually assured destruction” therefore deterring an all-out war. From a portfolio implication, dollar hegemony will wane over time. China alongside many EM central banks have been buying Gold and reducing their US$ holdings in earnest since 2018. The biggest threat to US$ hegemony does not come from ancient relic with negative carry and little industrialized use but from new technologies enabling digital currencies to be used not only for trade settlements and prevention of money laundering but perhaps for more nefarious intends like avoiding unilateral trade sanctions. China has spent the last five years studying a state-backed digital currency that not only can be used domestically via their ubiquitous digital wallets system but as a way of internationalizing its currency with its trade partners while not losing its ability to control capital flows. They have already piloted this project in four major cities two months ago and unlike the digital currencies we know that is vulnerable to cyber-attacks, fraud and wild swings in value, China digital currency is backed by the country reserves and centralized with PBOC in control of its supply. The plan is for PBOC to issue digital currency to state-owned banks as well as payment gateways who will then use it for goods and services settlement. Current laws in the US grants the American legal and financial systems wide-wielding power to freeze and seize US$ assets anywhere in the world under the guises of terrorisms etc. However, if the currency of trade between say China and Iran is via China’s digital currency that bypasses international settlements system, US would have lost one of the most powerful aspects of its dollar.

Insourcing and truncating global supply chains to be closer to home markets is another trend that should present opportunities for logistic companies. Companies that have production bases and dedicated sale strategies targeting countries with large population progressing into middle-income such as Vietnam and Indonesia will benefit tremendously. As we believe an outright nuclear war is an abominable unlikely outcome, conflicts between countries will likely be waged on the economic fronts including technology and medical supplies blockades and subversive intrusion in domestic politics. Cybersecurity, surveillance, biotech and of course 5G will be at the forefronts of this conflict.