BY JOHN FOLEY

The following imaginary conversation between two Wall Street bankers was overheard in the changing room of Park Avenue’s elite Racquet and Tennis Club.

Jordan: So, the head of our family office is starting to get a bit antsy about 2020. I know 2016 was uncomfortable, but this time is something else. It’s all tax the rich and shut down Wall Street. I feel like the market rally’s running out of steam, and Democrats are just out to punish anyone who’s made it. What are you hearing from your people?

Patrick: You worry too much. Donald Trump’s a shoo-in. Sure, he’s the least popular president to run for re-election in history and only the third to be impeached. But the economy, or I should say the consumer, is doing great. Housing starts are on a roll and impeachment is DOA in the Senate. Oh, and it’s hard to dislodge a president after just one term if the economy is fine. Remember that Jimmy Carter had kicked off a recession, and George Bush Sr. raised taxes.

Jordan: Right. All the same, you’ve got to be a bit nervous about what happens if the Republicans win, and he keeps on down this trade-war road. Last year our guys were forecasting global GDP growth of 3.6%, and now it’s more like 3%. In real money that’s about $400 billion down the drain – with hardly any actual tariffs. And the budget deficit is going up during the best of times. That’s totally contrary to what we learned in Econ 101 at Harvard.

Patrick: Relax, everyone knows he’ll strike a deal with the Chinese. If they don’t fold before the election, they’ll give in afterwards when they realize Trump’s got another four years to turn the heat up. Plus, worst-case scenario is that growth takes a hit. That’s when Jay Powell and the Federal Reserve will step in. They’ve got it covered. Bigly.

Jordan: Ok, but just bear with me. What if he loses. I just looked this morning and Elizabeth Warren and Bernie Sanders were right up there for the Democratic nomination. I mean, my teenage kids love Bernie, but this idea that capitalism is broken is bad news for markets, for dealmaking, and, you know, for people like us.

Patrick: Yeah, I hear you. Do you really think Bernie or Warren has a chance, though? Even if Trump flames out, I’m banking on the three B’s – Biden, Buttigieg and Bloomberg. Joe Biden’s an old hand – ok, maybe too old – who’s not going to rock the boat. Pete Buttigieg is a Harvard man and former McKinsey guy. As for Mike, well, I am still a bit sore about the way he dropped his membership here. But really, there’s no better man for the job.

Jordan: Don’t get me wrong – I love Mike as much as anyone – notwithstanding that whole brouhaha when he quit the club. Lots of Republicans I know would flip for him. But he’s nowhere in the race right now.

Patrick: Maybe. Don’t bet against an establishment billionaire though. He’s already spent more on TV ads in swing states than any candidate ever. And if Biden can’t go the distance, or things go down to the wire when the Dems pick their candidate at the convention in Milwaukee, he’s got a definite shot.

Jordan: How so?

Patrick: Think of it this way. It’s a super-crowded field. Usually we know by Super Tuesday in March who’s leading the pack, but that might not happen this time because the party’s so divided. If it’s all still up for grabs by the time the convention happens in July it’s all down to those 760-odd so-called superdelegates – you know, the party elites and so on. They changed the rules so they don’t vote in the first round this time unless there’s an obvious winner already. If there isn’t, they wade in and we go to a brokered convention.

Jordan: Oh yeah, a brokered convention. Remind me?

Patrick: Basically, that’s where anything could happen. It’s a bunch of horse trading where people can switch their support and there’s another vote for the nomination. Everyone always predicts there’ll be one and it never happens, but this time could be different. If the delegates want someone closer to the center, that’s when Bloomberg could emerge as the dark horse. Or Amy Klobuchar or Buttigieg – someone centrist, maybe from the Midwest, who can win those states Hillary Clinton lost.

Jordan: Hmm. And if he doesn’t? What’s the plan if Warren or Sanders come out on top? I tell you, Bernie makes me nervous. He’s angrier than my wife was the day I got her that Peloton.

Patrick: Come on, dude. Being POTUS isn’t like being the candidate. Even Liz and Bernie, when they realize how much of the economy relies on finance, they’ll change their tune. And either way, they can’t do squat if the Senate remains divided. You can also bet that Jamie Dimon and a bunch of other moderate corner-office guys will be working to get them onside. The best thing about having an inexperienced POTUS is you can help mold their views.

Jordan: I guess. I feel like I heard that somewhere before. Anyway, I’ve got to split.

Patrick: See you at Buffy’s thing this weekend in Bridgehampton.

First published Dec. 30, 2019

IMAGE: REUTERS/Brendan McDermid

BY ED CROPLEY

President Cyril Ramaphosa is running out of time to salvage South Africa. A flatlining economy and soaring debt-servicing costs are squeezing public spending. The obvious option is to shrink bloated state firms like power utility Eskom. That will provoke trade union protests and strikes, which may dent the economy. A failure to press ahead will be worse in the long run.

South African government bond yields are relatively stable, at around 8.4% for 10-year debt, but Pretoria’s debt pile is growing. The government expects it to hit 80% of GDP in 2023 from the current 69%, including borrowing by Eskom. That will push up debt-servicing costs. In 2020, South Africa will spend more on interest payments than healthcare for the first time in the post-apartheid era.

Ramaphosa’s fiscal wiggle room would be bigger if he could turn around troubled state-owned companies. His first test is South African Airways. True, the debts of the perennially loss-making airline are only $1.5 billion, less than 1% of total public debt. They also pale against Eskom’s $30 billion debt pile. But unlike Eskom, which supplies 90% of South Africa’s power, SAA can go bust without taking down the $360 billion economy.

Unions have opposed cuts to the airline’s 5,000-strong workforce. Yielding ground would weaken Ramaphosa for the more important fight over Eskom, which is teetering on the brink of bankruptcy and struggling to keep the lights on. The government is willing to take a chunk of the utility’s debt onto its books. But it also wants to split the company into three to improve efficiency, possibly as a stepping stone to privatisation. Eskom bosses also reckon they need to axe 16,000 jobs, a third of the workforce. That would trigger sustained and violent protest.

Blackouts due to sabotage or strikes would hurt the economy. But caving in to unions would carry even greater long-term costs. Without a profitable Eskom to invest in a stable power supply, billions of dollars in investment pledges will lapse and the economy will further atrophy. Ramaphosa’s leadership of striking mine workers in the 1980s played a central role in collapsing the apartheid economy and ending white-minority rule. His battle with unions in 2020 will decide the country’s next chapter.

First published Nov. 29, 2019

IMAGE: REUTERS/Siphiwe Sibeko

BY LISA JUCCA

Ursula von der Leyen is starting on the defensive. Despite her ambition to overhaul the European Union, the new European Commission president is unlikely to persuade Italy and Germany to set aside their differences on common banking rules any time soon. A plan to tax technology giants offers a better chance for the traditional EU rivals to find some common ground.

Among her long list of promises, the former German defence minister has pledged to complete the euro zone’s half-baked monetary union. To enable lenders to operate freely across the 19-nation currency bloc, member states first need to agree to common deposit insurance, as well as a fund to handle the cost of bank failures.

Rome and Berlin are in opposite corners. German leaders want Italy to reduce financial risks, including its $2.5 trillion public debt, before signing up to measures that could see euro zone taxpayers share the cost of a future crisis.

Meanwhile, Italian officials object to Berlin-backed suggestions that euro zone sovereign bonds should carry different levels of risk when calculating bank capital requirements. Stripping Italy’s public debt of its current risk-free status would hit domestic lenders, which are large holders of the securities. That might accelerate an Italian debt blowup.

Messy politics in both countries will hamper any compromise in 2020. Italian Prime Minister Giuseppe Conte’s coalition is fragile and under constant attack from eurosceptic leader Matteo Salvini, the likely winner of any election. Meanwhile, German Finance Minister Olaf Scholz, who championed a recent plan to create a common deposit backstop, has become less influential after losing out in a recent vote to lead his Social Democratic Party.

It thus makes sense for von der Leyen to change tack. A more promising idea is a plan to impose a 3% levy on the revenue of global tech companies such as Facebook and Amazon. That would help redress an imbalance which the commission says allows digital players to pay an effective 10% corporate tax rate, against 23% for brick-and-mortar rivals. The project needs to overcome opposition from small low-tax states like Ireland – and faces fierce criticism from President Donald Trump.

But France, Italy and Germany all like the idea. While banking union remains elusive, the tech tax could unite the euro zone’s biggest adversaries.

First published Dec. 19, 2019

IMAGE: REUTERS/Francois Lenoir

BY DASHA AFANASIEVA

A thaw is coming early this Russian winter. Inbound retail and technology investments are hints of improvement in the business climate, and fresh sanctions fears have eased off. But these bright spots won’t save the G20 country from economic stagnation in 2020.

The owner of U.S. retailer TJ Maxx acquired 25% of Russian low-cost clothing retailer Familia for $225 million in November, the first big Western investment since Washington and Brussels imposed sanctions over Russia’s annexation of Crimea in 2014. New York-traded search engine Yandex may float its ride-sharing business, part-owned by Uber Technologies, in 2020, Reuters reported. Bank VTB Capital expects Russian companies to raise more than $10 billion through equity listings over the next year – a big improvement on $484 million raised in 2018, according to Refinitiv data.

Yet investors should be wary. For one thing, existing sanctions are not going away. And Russia’s economy is still stuck in a rut with growth forecast below 2% in the coming years after a 2.3% expansion in 2018. President Vladimir Putin’s plans to spend billions of dollars enhancing business conditions, infrastructure, healthcare and ecology have been slow to take off. They also merit healthy scepticism. Business conditions are hardly friendly when – as one example – Michael Calvey, the American head of one of the country’s biggest buyout funds, is under house arrest over a dispute relating to a portfolio company.

Russia is protected from much scrutiny by chaos elsewhere. With military action in Ukraine and Syria, Putin has perfected a foreign policy along those lines, and the same goes for business. U.S. lawmakers are too busy with the Democrats’ efforts to impeach President Donald Trump and their election in November 2020 to enact major new sanctions – a worry for Russian businesses as recently as last summer. Washington’s trade fights with China and the European Union also serve as distractions that are welcome in Moscow.

Investors can find chunky yields in Russia, particularly if they are happy to own stakes in companies that are tools of Putin’s government. Gazprom, for instance, brought shareholders a total return of around 75% in the year to mid-December partly thanks to a new bumper dividend policy. Some may find that worth the risk. But if they are warming to Russia more generally, they are likely to feel chills again.

First published Jan. 2, 2020

IMAGE: Alexander Zemlianichenko/Pool via REUTERS

BY PETER THAL LARSEN

Britain will soon know what Boris Johnson’s pledge to “get Brexit done” actually means. The UK Conservative Party secured a large parliamentary majority in Thursday’s general election. That will allow Britain to quit the European Union three and a half years after voters narrowly opted to leave. The prime minister’s policy ambitions, however, remain a black box.

The result is an overwhelming vindication of Johnson’s decision to campaign on a single repetitive promise. His government’s hefty majority will ensure Britain leaves the EU at the end of January. It should also make it easier for Johnson to secure a trade deal with the remaining 27 countries by the end of 2020, a tight deadline he says he will not extend. That’s because Johnson will no longer be captive to the eurosceptics in his party, who dream of turning Britain into a lightly-regulated capitalist nirvana. If the prime minister opts for a closer alignment with the EU, it will be hard to stop him.

Markets reflect the hope that Johnson will have the authority to push through a softer version of Brexit. The pound was up almost 2% against the U.S dollar. Soaring stocks will deliver a short-term feel-good factor. Foreign investors who fretted about Labour Party leader Jeremy Corbyn’s hard-left agenda will decide that their money is once again secure in Britain.

Yet what Johnson plans to do with post-Brexit Britain is a mystery. His decision to campaign to leave was famously motivated by personal ambition. His election campaign was largely free of policy ideas, beyond vague promises to hire more nurses and police, and a pledge to prop up ailing companies.

He will also face high expectations, particularly among former Labour voters in the north of England. Leaving the EU will still inflict long-term economic damage and any blame will fall squarely on Johnson and his government. Meanwhile, a strong election performance by the Scottish Nationalist Party will revive pressure for a new independence referendum north of the border. Johnson will get Brexit done. It’s still not clear that voters will be glad he did.

First published Dec. 12, 2019

IMAGE: REUTERS/Hannah McKay

BY ROBYN MAK

Keep a close eye on Taiwan in 2020. Its significance is set to grow amid shifting supply chains. Anti-Beijing sentiment also has been gaining traction in the United States. Both dynamics herald deeper ties between Taipei and Washington, bolstering the case for a controversial bilateral trade deal.

The $560 billion economy is an unlikely beneficiary from U.S.-China tension. While other Asian export powerhouses grapple with slowing demand, Taiwan recently nudged up its GDP growth forecast for 2020, to 2.7%. Rising domestic investment should help, boosted by local manufacturers moving operations back home from mainland China.

Moreover, American companies are buying more from Taiwan. In the first half of 2019, for example, U.S. tariffs diverted over $4 billion of office machinery and communications equipment orders to the island, according to a UN report. The likes of Microsoft and Alphabet’s Google are among those stepping up investments there.

Against this backdrop is growing American antagonism towards the People’s Republic, which considers self-governed Taiwan a renegade province. President Donald Trump signed a veto-proof bill effectively supporting anti-government protesters in Hong Kong. Soon after, the U.S. House of Representatives roundly passed a bill that condemns the crackdown on Chinese Muslims in Xinjiang.

Taiwan is next on the legislative agenda. The Taiwan Allies International Protection and Enhancement Initiative Act calls for the United States to reduce engagement with countries whose actions have undermined Taiwan. Under President Tsai Ing-wen, who faces an election in January, and her independence-leaning Democratic Progressive Party, eight countries have broken diplomatic relations with Taiwan in favour of Beijing. The U.S. proposal also calls for bilateral trade talks.

That will provoke Chinese President Xi Jinping and could even derail already-fragile U.S.-China negotiations. But there is a strategic rationale for a trade agreement with Taiwan.

American giants such as Apple and Qualcomm rely on Taiwanese components. Manufacturing export orders from the United States reached some $150 billion in 2018. And while companies including TSMC are leading the charge for next-generation semiconductors, China is catching up quickly. A deal may help Tsai defend the industry, and ultimately reduce her economy’s dependence on the mainland. But it also means Taiwan is destined to be a flashpoint.

First published Dec. 18, 2019

IMAGE: REUTERS/Tyrone Siu