CHART OF THE MONTH THIS MONTH, THAT YEAR BIZARRE! September China s Diverging Property Market Raises Bubble Risk

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1 Trade-off?

2 CHART OF THE MONTH THIS MONTH, THAT YEAR On 8 th October 1993, the U.N. General Assembly lifted economic sanctions against South Africa following the end of racial apartheid. The sanctions had been imposed since the 1960s. Although largely symbolic, the South African economy suffered as banks and international financial institutions were discouraged from dealing with them. Speaking at the United Nations General Assembly in 1993, Nelson Mandela asked that the sanctions be lifted since South Africa was doing its utmost to institute a democratic system in which the white minority no longer ruled by force of law. Source: Bloomberg China s Diverging Property Market Raises Bubble Risk The cost of renting an apartment in China has relatively held steady this year, while the price of buying a new home has surged, with the gap widening even further over September. This widening divergence between booming house prices and flat rentals is an indication of a property bubble brewing in China. BIZARRE! Usually when Apple files a new patent, the IT world takes notice. However, they were in for a big let-down when it came to light that Apple s latest patent is for a paper bag. In the patent filing, Apple claim that this new bag is made entirely of paper and is 60% recyclable. They also go on to add that the structure, strength and resistance of the bag make it suitable for costumers to reuse, thereby reducing its environmental impact. Needless to say that Apple was subject to a deluge of mockery on social media once this news was made public. Source: The Telegraph THE BOTTOMLINE 2

3 Trade-off? In 2010, around two dozen US Steel employees received an from their CEO, however these seemingly harmless s actually originated from a Chinese hacker operating under the alias of UglyGorilla and were hiding a cleverly disguised virus. Within a few weeks, the virus had penetrated at least 1,700 of US Steel s computers and mobile devices. Within two years of this attack, China s Baosteel launched their line of ultra-high-strength steel for the car industry, using techniques US Steel took more than a decade to develop. Unsurprisingly, US Steel dragged Baosteel to court. While this might look like another instance of intellectual property theft, the outcome of this case could have serious ramifications on the global trade ecosystem. US Steel have accused Baosteel stealing corporate secrets through the use of state-sponsored cyber attacks and have called for the ban of all Chinese steel to the US. In a world threatened by languishing growth rates, ever increasing unemployment and a challenging political environment, many countries are leaning towards protectionist measures in order to safeguard their economies. The US Steel allegations add fuel to the increasing popularity of anti-trade polices we are currently witnessing. While Donald Trump and Hillary Clinton, the candidates for the next President of the United States, might not agree on most things, one topic they see eye-toeye on is protectionism. Trump, though incoherent on most of his policies is clear on one thing. If he were to be elected, he vows to dismantle the Trans- Pacific Partnership (TPP) and start a trade war with China. In a surprising turn of events, Hillary Clinton too denounces the TPP, the very pact she helped draft and negotiate. Across the ocean from the US, it is highly unlikely that the Transatlantic Trade and Investment Partnership, a major trade deal between the US and the European Union will see the light of day with German and French officials expressing concerns over the terms of the deal. With countries leaning towards anti-trade policies, lawmakers are coming up with creative forms of protecting their domestic industries. Many countries are adopting new rules for packaging and labelling, making it very difficult for overseas companies to sell their products. Digital Protectionism is the latest form of anti-trade propaganda threatening to disrupt the global trade environment. Protectionist regulations in China, Russia, India, Brazil and even the EU and US currently pose as serious threats to the global IT Industry. Additionally, the Great Firewall of China, the system Beijing uses to control its citizens access to the internet is being touted as the world s biggest trade barrier. While the primary aim of the firewall is to protect the Chinese population from any anti-social elements, it serves a far greater purpose of protecting the Chinese IT industry from their global counterparts. The current backlash against global trade is not without reason; it is a symptom of the anxiety about the effects of open economies. Furthermore, the Brexit vote brought to the fore the concerns the general public has regarding the impact of unchecked immigration (a side effect of an open economy) on public services, jobs and culture. However, there is a vast difference between working towards improving the current globalization scenario to completely reversing it. THE BOTTOMLINE 3

4 The overall benefits of free trade are unarguable. The explosion of world trade after the Second World War can be considered a major factor in improving global living standards and transforming economies from South Korea to Ireland. Speaking in Washington before the IMF s recently concluded biannual gathering, the Director of the IMF, Christine Lagarde came down heavily on protectionist policies and blamed the Western Governments for allowing antitrade policies to restrict trade flows, contributing towards weak and fragile global growth over the past few years. She labelled such anti-trade policies as a form of economic malpractice and urged Governments to act quickly in order to lower trade barriers to boost global growth and inequality. Contrary to the public opinion, an open immigration policy does indeed provide a host of economic benefits. European immigrants arriving into Britain since 2000 have been net contributors to the exchequer, adding more than 20 billion to UK s coffers between 2001 and Additionally, foreign direct investment encourages the sharing of technology, jobs and business know-hows, further improving the host economy. Protectionist policies harm consumers and do little in the way of protecting workers. A study of 40 countries concluded that the richest consumers would lose only 28% of their purchasing power if cross-border trade ends. In comparison, the bottom 10% of the consumers would end up losing 63% of their purchasing power. A further study conducted by the Peterson Institute of international economics estimated the switch to non-chinese tyres after the Obama administration slapped anti-dumping tariffs in 2009, cost the American consumers around $1.1 billion. This amounts to a cost of over $900,000 for each of the 1,200 jobs which were allegedly saved as a part of the antidumping exercise. The IMF too recently concluded that the cumulative effect of bilateral trade tariffs for two generic countries would reduce national growth and imports/exports by 0.2% and 2.0% respectively. In a way, the rising popularity of anti-trade measures is not unjustified. Consistent periods of low growth coupled with an ever increasing chasm between the rich and poor have fuelled the popularity of anti-establishment measures and nationalistic policies. Governments are looking to respond to these shifting political winds by deviating from their free-trade stance and adopting a more nationalist agenda. However, turning the back on globalisation is not the answer. We have come a long way from the era of protectionist policies which crippled the global economy in the 1930s and moving back to such an era would be a mistake. Open economies will always offer greater and more varied opportunities than closed ones and opportunities generally make people better off. In the short term, the move to protectionism will prove to be just another headwind to global trade and growth. To avoid falling back into a protectionist era, Governments must make concerted efforts and commitments towards open and free trade. However, given the busy election calendar in the US and Europe, we may be in for some interesting times ahead. - Nikhil Mulgaokar The information, facts or opinions appearing in the article do not constitute investment advice. THE BOTTOMLINE 4

5 $2,000,000,000 Samsung s expected losses as a result of ceasing the production of the Galaxy Note 7 Source: New York Times TWEETVESTMENT POINT BLANK Debating is like investing. There is no good or bad, the only thing that matters is better or worse than expectations. ~@ReformedBroker (Josh Brown) Equities look like a better investment because yields everywhere else are suppressed due to poor economic fundamentals ~@GreekFire23 Market is likely to fall from here. Although could go up. Possible flat. You ve been warned. ~@morganhousel (Morgan Housel) Source: Hedgeye THE BOTTOMLINE 5

6 IN A NUTSHELL British Prime Minister Theresa May announced that she would officially start the process for UK's exit from the European Union by the end of March 2017 Bank of Japan in its September meeting announced that yield curve control would become an integral part of its monetary policy by aiming to keep 10 year government bond yields at near zero levels. It kept policy rate steady at -0.1% and said that it would continue with its current asset purchase programme of 80 trillion annually. The US entered the final phase of the 2016 Presidential elections with Hillary Clinton coming better off over Donald Trump in the first two Presidential Debates China s Yuan was added to the International Monetary Fund s (IMF s) basket of reserve currencies, joining the US Dollar, Euro, Yen and the British Pound. ASSET RETURNS Commodities Asia Pacific (ex Japan) Equities Emerging Market Equities UK Equities European (ex UK) Equities Global Equities High Yield Bonds Emerging Market Debt ($) PERSPECTIVES Almost three quarters of all central banks combined assets are held by four of them Rest of World, 27% European Central Bank, 16% Infrastructure US Equities Crude Oil Gold Private Equity Source: Bloomberg People's Bank of China, 21% Bank of Japan, 18% US Federal Reserve, 18% Corporate Bonds Japanese Equities Gilts -6.00% -4.00% -2.00% 0.00% 2.00% 4.00% THE BOTTOMLINE 6