Over the past week the biggest names in business, finance and politics descended upon the small Swiss town of Davos for the annual World Economic Forum.
The series of panels and speeches were dominated by discussion over the world’s largest challenges – climate change, the migration and refugee crisis, trade and globalisation. However, amidst such grand themes, there are some lessons and insights relevant for retail investors that can be gleaned.
1) Global growth is good…
Davos is usually a fairly optimistic affair. However, last year a slight shadow hung over the gathering in the form of Brexit and the start of Donald Trump’s presidency. Some worrisome phrases have also been bandied about over the past couple of years, such as ‘secular stagnation’.
This year, however, thanks to strong economic growth, these worries have, at the very least, fallen to the wayside. Speaking on one panel, Christine Lagarde, managing director of the IMF, said: ‘All signs point to a further strengthening [in global growth] both this year and next. This is very welcome news.’ The IMF expects the world economy to grow by 3.9 per cent in 2018, helped by a better outlook for the US and Eurozone. Most notably, for the first time since the financial crisis, all parts of the world economy and broadly growing together in tandem. Growth is good for earnings and therefore good for equity valuations.
2) … but concerns remain
Tempering the optimism, JP Morgan’s international chairman Jacob Frenkel warned attendees that excessive levels of debt remained an issue. While noting that optimism was justified, considering that the world economy has re-entered into a period of co-ordinated economic growth, he warned that ‘problems arise, always, when you are overly optimistic (and) when you take too much debt.’
He warned that growth had to be grounded in real economic activity, not debt. ‘Increasing debt is based on the assumption that you will be able to pay it, that you may be able to refinance it, that interest rates will stay low and all of these assumptions need to be tested,’ he said.
3) Trump may nor may not rock the boat
Donald Trump’s attendance and speech is either another reason to be optimistic or another risk – depending on who you ask. In recent weeks concerns over the US going the route of protectionism picked up once again, with new restrictions on solar panel imports being announced and comments from Steve Mnuchin, US secretary of the treasury, about the week US dollar among other things. Trump’s speech, however, took a more conciliatory tone. While the president spoke of ‘massive intellectual property theft’ and decried an ‘unfair’ trading system (a thinly veiled attack on China), he spoke of ‘America First, not America alone.’ To some the speech is a softening of Trump’s nationalist agenda, which is good news for global growth and equities. For others, it changes little and the threat of a tit for tat trade war with China remains a key concern.
4) Robin hood tax for British investors.
Shadow chancellor John McDonnell also attended. The Labour Party member called on attendees to recognise anger surround economic inequality and reiterated the need for a Robin Hood tax – an extra levy on the purchase and sale of shares. ‘We will introduce a Robin Hood tax and we will use it to fund public services and maintain our commitment to developing countries as well, he said. If the proposals ever see the light of day cost increases through the tax rise may be passed on to retail investors.
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