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Kempen's Commentary: Intellectual quarantine

06 March 2020


Intellectual quarantine

When I write this column, markets are struggling with the effects of the coronavirus. Investors are wondering when our global economic activities will fully resume again. If this happens in Q2, then the prices may be able to move back in the right direction. The same thing happened with the SARS outbreak in 2003. But for this to happen, the spread of the virus must first lose its momentum.

And after that (whenever this will be) the question will arise whether corona will have any structural consequences. For example for the Chinese political landscape.

The Chinese ‘social deal’ essentially means that the people lose liberties in exchange for economic growth. Should Peking be blamed for the loss of the latter, will it then loosen its controlling grip too? Or will just the opposite happen: an even tighter grip.

If the past can serve as a guide, then the second option seems more likely. Once in a while the hope or expectation emerges that China will subside its central authority somewhat, for example when the country joined the World Trade Organisation (2001) or when Xi Jinping took office as president (2012). Until now, this expectation has turned out to be in vain. Even now, the central authority already starts to claim that the virus is slowly being subdued thanks to its own resolute approach.

A second potential corona consequence is that the headwind for globalisation is fuelled. Political standpoints in that area are already being more and more heard.

And then there is the technological impact. From the 90s onwards, lower transport and communication costs gave globalisation a boost. Nowadays, technology is an argument for insourcing. A good example of this is Adidas 3D-printing sneakers in Germany now.

Disrupted production chains due to corona can be a reason for companies to take a closer look at the international character of these chains.

All of this is relevant to investors: recurring technology-based production boosts overall productivity and consequently the structural growth potential of an economy. Higher productivity is an important path to more growth for aging regions such as Europe or Japan. Whether or not this is achieved has direct consequences for the regional allocation of an investment portfolio.

As far as the political system in China is concerned: more centralisation of authority and nationalist sentiments often go hand in hand. The chances of geo-political tensions increase as a result, which is not really beneficial to economic growth.

Whether there will be long-term consequences of this virus and what they will be, is still uncertain. Maybe some, maybe none. But putting ourselves in an intellectual quarantine and simply ignoring possible outcomes would be a bad idea.

The author

Luc Aben

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