Jupiter vice chairman Edward Bonham Carter has warned politics are a bigger risk to global growth in the wake of the global financial crisis.
Reflecting on the anniversary of the Lehman Brothers collapse, Bonham Carter described predicting the cause of the financial crisis as a “fool’s game”. “We have seen, for instance, massive growth in passive investing and algorithmic trading and at this stage we can only guess how they might behave in stressed conditions.”
Banks were unlikely to be the cause of the next financial shock having been forced to clean up their act over the last decade, he said.
But politics in Turkey, Russia, the UK and the US are all cause for concern. “Geopolitical friction can easily escalate and needs to be monitored carefully.”
Demagogues, election meddling and Brexit
He said: “In Turkey, power is concentrated in the hands of one man, Recep Tayyip Erdogan, a demagogue with unorthodox economic views that have contributed to his country’s current crisis.
“Over in Russia, the economy struggles as Vladimir Putin’s de facto annexation of Crimea, his country’s alleged meddling in the US elections and involvement in Syria have sparked a raft of international sanctions.
“In the UK, economic growth has slowed since Brexit while the election of Donald Trump and his policy of America First have led to a tit-for-tat trade war with global growth the most likely victim.”
Central banks become a strait jacket
The US Federal Reserve, the People’s Bank of China, the European Central Bank and the Bank of England now hold $20trn in assets on their balance sheets, Bonham Carter noted in reference to extraordinary monetary policy in the post-financial crisis era.
Central banks have inflated asset prices and now threaten to destabilise markets as they shrink those balance sheets, he said. “For the last decade financial markets and central banks have been locked in a tight embrace. It’s an embrace that has increasingly felt like a strait jacket.”
He pointed out the global economy has been indulging in cheap debt since 2007.
McKinsey reports that total global debt has surged to $169trn from $97trn on the eve of the crisis.
Despite the threat of the rising US dollar to emerging market debt, he said many now only borrow in foreign currency where they have foreign currency revenues to provide a natural hedge. Capital management had also improved, while technology was becoming an increasingly important component of emerging market economies that have traditionally been at the whim of commodity prices.
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