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Ruchir Sharma’s investor guide to 2023: from peak dollar to better TV

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Talking to leaders these days in any walk of life, I have a sense that people are frozen. They see that inflation is back in a serious way for the first time in decades, forcing central banks to raise interest rates at the fastest pace since the early 1980s. They understand that this sudden change in the price of money — the most important driver of economic and financial behaviour — marks a fundamental break with the past. But they are not acting. After living with easy money for so long, they find it difficult even to contemplate a different world. There is a term for this state of mind: zeteophobia, or paralysis in the face of life-altering choices.

So many people keep doing what they were doing, hoping that somehow they won’t have to deal with change. On the assumption that central banks will once again come to the rescue, investors are still pouring money into ideas that worked in the past decade — tech funds, private equity and venture capital. Governments are still borrowing to spend and homeowners are refusing to sell as if easy money was bound to return soon.

But tight money is not a temporary shock. The new standard for inflation is closer to 4 per cent than 2 per cent, so interest rates won’t be falling back to zero. As this phase wears on, tycoons, companies, currencies and countries that thrived on easy money will stumble, making way for new winners. Some things will improve. The time of lavishly ridiculous digital coins and TV shows will pass. An age of more discriminating judgment will shape the trends of 2023.

1. Peak dollar

The dollar has been the world’s dominant currency for 102 years, eight years longer than average for its five predecessors going back to the 15th century, including most recently the British pound. Decline is overdue. Yet the prevailing assumption remains that, lacking serious rivals, the dollar can stay dominant — now and for the foreseeable future.

The dollar’s long rule has been far from a steady climb, instead rising and falling in long cycles. Its two major upward swings — one starting in the late ’70s, another in the mid ’90s — lasted about seven years, yet by October its latest upswing was 11 years old. The greenback is now as expensive as it has ever been, on some metrics. Lifted by the dollar, New York rose to top (jointly with Singapore) the list of the world’s most expensive cities for the first time in recent history.

Line chart of Dollar trade-weighted index showing A long period of dollar strength may be coming to an end

The dollar is overvalued by about 25 per cent, and that kind of overvaluation foretells decline. The dollar started falling in October, turning at almost exactly the same point — 20 per cent above its long-term trend — that has on average signalled multiyear falls in the past. This year the economy is expected to grow more slowly and interest rates are set to rise less in the US than in other major nations. These signals point to a further fall for the dollar and less global purchasing power for Americans, more for everyone else.

2. Rise of the ROW

The ROW, or “rest of the world”, has been living in the shadow of US financial markets for years and many believe that this aspect of American dominance will continue. After all, the US has been the best performing market in the world over the past century and so, many argue, why bother investing anywhere else?

But is anyone alive today waiting for returns a century from now? Consider a more practical timescale. Since the second world war, the US stock market has tended to outperform the ROW one decade, then trail behind the next. The 1950s, ’70s and 2000s were great decades for investing outside the US.

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In the boom of the 2010s, the value of the US stock market expanded, reaching 60 per cent of the global total in 2021, a full 15 per cent above its long-term average. In every other way, the global footprint of the US is much smaller: less than half of corporate earnings, a quarter of economic output, one-fifth of listed companies, and a mere 4 per cent of the population.

Bar chart of US share of global... (%) showing The global footprint of the US is smaller than implied by its dominant  stock market

With US stock valuations near post-second-world-war highs compared to the ROW, investors sticking with American companies are assuming that the US can improve its position, not just hold it. That’s not a safe assumption, particularly now that the era of easy money is over. By one estimate, half of the increase in US corporate profitability in the last decade can be attributed to lower interest costs. True, easy money was available in most countries. But financial engineering to boost returns became an American speciality.

3. Not-so Big Tech

Big decades for the US market tend to coincide with tech booms. In the ’90s, the likes of IBM in software and Cisco in internet hardware led a rush of US companies into the global top 10 by market value. But companies that make the top 10 one decade rarely last there the next, and tech is particularly prone to disruption.

In the 2010s the leading tech firms rose in mobile internet services — shopping, search, social media — but that model is showing signs of exhaustion. Earnings are under pressure from the law of large numbers, regulators, competitors. Of the seven tech firms in the global top 10 as of 2020, three have fallen off. Two of those are Chinese, Alibaba and Tencent. One is Meta, which has fallen out of the top 20. The value of the other American giants is shrinking too, although they still hold on to top 10 positions, for now.

The next evolution of the information age is dawning, and it will generate new models and winners. One possibility: they will apply digital tech to serving industry — biotech, healthcare, manufacturing — not individual consumers.

If it is still hard for frozen imaginations to think of a time not dominated by today’s big tech names, the arrival of tight money makes churn at the top even more likely. Easy money encouraged risky bets on expensive but fast-growing stocks, which in the past decade meant big tech. Now that bias to bigness and growth at any price is fading.

4. Less money, better TV

Unlimited access to cheap capital helped to fuel what has been widely hailed as a “golden age of television”. Worldwide spending by the big streaming services on new content rose over the past five years from under $90bn to more than $140bn. The number of new shows scripted for TV exploded.

Line chart of  showing Bigger budgets have not produced better TV

But like most hot trends of the easy money era, TV was spoiled by too much money. The golden era tarnished itself, producing more quantity, less quality. The average IMDb rating for Netflix TV shows peaked in the mid-2010s at 8.5 out of 10, then fell steadily to 6.7 in 2022. The subject of how and where to find the few riveting shows in this expanding menu of mediocre options became a staple of dinner table conversations. For every gem like The White Lotus or Tehran, there were dozens of duds like ‘Snowflake Mountain’ and, of course, The Kardashians.

Viewers will feel less lost in the coming year. In recent months, the big streaming services have shifted focus to making a profit, rather than spending whatever it takes to get new subscribers. They are ordering fewer new shows and — according to the TV writers and producers I know — imposing higher standards on new pitches and scripts. This is one of the many ways that less money could produce better choices in the new era.

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5. Echo bubbles

Bubbles don’t necessarily burst all at once; the declines are often punctuated by big rebounds — “echo bubbles”. These bounces cushioned the fall of many famous bubbles, from commodities in the 1970s to dotcoms in the late 1990s.

By early 2001, the Nasdaq had fallen nearly 70 per cent, but it would stage two false rallies before the year was out. The echo bubbles looked big — with tech stocks up as much as 45 per cent. But it was a mathematical illusion. Bouncing off such a low bottom, tech would have had to rise 250 per cent to regain its previous peak, and never came close in 2001. Tech finally hit bottom the next year, and remained sluggish for the rest of the decade.

During the pandemic, bubblets emerged within the broad markets, appearing in small cap stocks, clean energy stocks including Tesla, cryptocurrencies including Bitcoin, Spacs or “special purpose acquisition companies,” and tech stocks that have no earnings but include famous names (Spotify, Lyft). These bubblets have already suffered falls of 50 to 75 per cent, but the story is not over. The fortunes of crypto kings and Elon Musk are still whirling wildly.

The psychology behind bubbles is powerful. People refuse to easily abandon the idea that inspired the bubble. They buy the dips and give up only after their faith has been deflated repeatedly. 2023 is likely to see more echo bubbles, including in the most hyped themes of the last decade: big cap tech in the US and China. But don’t be fooled again. The next big winners will be emerging elsewhere.

6. Japan is back

The image of “rising Japan”, unstoppable superpower, was so ingrained in the global imagination that as late as 1992 US presidential candidate Paul Tsongas could proclaim that “the cold war is over, and Japan has won”.

Today, to the extent Japan has an image, it is old people and bad debts, not superpowerdom. Global investors barely give a thought to Japan, which is just what its leaders should hope for. If hype surrounds countries at a peak, and hate piles on in a crisis, those poised for success are shrouded in indifference.

Quietly, Japan is turning for the better. Growth in the working age population, which turned negative in Japan three decades ago, is about to turn negative across the developed world. Measured as a share of the economy, private debt is on average higher in other developed economies than in Japan.

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Japanese households and corporations reduced their debt load for much of the last decade, and will be less hard pressed in a tight money era than many outsiders may assume. Profit margins have been rising steadily. The cost of labour, adjusted for worker productivity, is now lower in Japan than in China.

Japan may not be back in the sense of a rising superpower, but it is poised for a relatively good 2023.

7. ‘Anywhere but China’

Couple rising labour costs with Beijing’s turn away from openness toward state control, and many foreign companies looking to outsource production now look, so it is said, “anywhere but China”. In the US, there is talk of manufacturing coming “back home”, or moving next door to Mexico, but the big winners so far are next door to China: Vietnam, Taiwan, India and South Korea.

More than half of US businesses in China say that their first choice for relocation would be other countries in Asia; less than a quarter say back home; less than a fifth say Mexico or Canada. These decisions are guided by all manner of risks and costs, but a central advantage of Asia outside China is wages.

The average monthly factory wage in Vietnam and India is less than $300 — about half the level of China, a quarter lower than Mexico, a small fraction of the $4,200 monthly wage in the US. No wonder American companies are still looking to offshore, just not in China.

8. Return of orthodoxy

In November, amid a market sell-off widely attributed to his generous spending plans, Brazilian president Luiz Inácio Lula da Silva dismissed the sellers as “speculators, not serious people”. Investors have resumed the sell-off, forcing Lula aides to walk back some of his remarks.

Other countries targeted by market sell-offs in 2022 included Chile, Colombia, Egypt, Ghana, Pakistan, Hungary and even the UK. What they shared: high external and government deficits and unorthodox leaders who threatened to make those deficits worse.

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The choice of targets was rational, not ideological. Sell-offs hit leftwing populists such as Lula, and conservatives like UK prime minister Liz Truss, who lost her job in the fallout. All had to retreat in substance or tone. Colombia’s finance minister promised to “do nothing crazy”.

As money tightens, the market grows less tolerant of the unorthodox, and its target list grows. Compared with the roughly eight countries targeted last year, the markets turned sharply against only a few in the 2010s: most notably Greece, Turkey and Argentina.

Since then, Greece has cut its deficits and debts, and returned as a welcome borrower in global markets, but Turkey and Argentina have not. Expect more of these battles in 2023.

9. Political relief

What’s not happening will shape the political mood in 2023. For the first time this century, no G7 country is holding a national election. There aren’t many election battles in the other G20 nations, either. These days elections sow more discord than unity, so the pause will come as relief.

In election years, developed markets tend to lag their peers, but emerging markets tend to gain, perhaps on hope that new leaders can have a bigger impact on economic growth in younger nations. With few big elections, the spotlight may shine brighter on smaller ones. Two stand out as rife with possibility.

In Turkey, President Recep Tayyip Erdoğan faces a serious challenge after nearly 20 years in power. A classic case of a leader who started strong but lost his way, Erdoğan is now perhaps the world’s most financially unorthodox leader, a standing risk to his nation’s future.

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In Nigeria, President Muhammadu Buhari made life worse. Poverty rose, corruption festered. Now Buhari is out, thanks to term limits. Any of the four key contenders in the February election could be an improvement. The most intriguing is Peter Obi, a political outsider with serious plans to clean up Nigeria’s oil theftocracy. A quiet political year will feel even better if a few elections produce bright new reformers.

10. Blue birds

In the late 2000s, author Nassim Nicholas Taleb popularised the “black swan”. Written as a theory of unexpected events that can disrupt for better or worse, the term became synonymous with negative shocks during the global financial crisis of 2008. People have been on the lookout for black swans ever since.

Now the idea of the good black swan may come back as the “blue bird” — a rare, unforeseeable event that brings joy. Geopolitical shocks and economic gloom have persisted since 2008, and could get worse in the tight money era. Amid endless worries, the world may turn its risk radar toward positive shocks that could bring relief.

The next blue bird might be a surprise peace in Ukraine, which instantly lowers energy and food costs. A thaw in the US-China cold war, which boosts global trade. A new digital technology that revives productivity, helping to contain inflation. None of this may seem likely, but then surprise is the essential nature of blue birds.

Ruchir Sharma is an FT contributing editor and chair of Rockefeller International

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Economic

How strained relations between China and Australia affected trade in coal, barley, beef and wine by Reuters

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© Reuters. FILE PHOTO: The rim of the Mount Owen coal mine in Glencore and adjoining land rehabilitated in Ravensworth, Australia, June 21, 2022. The photo was taken June 21, 2022. The photo was taken with a drone. Photograph: Lauren Elliott/Reuters

(Reuters) – China is resuming coal trade with Australia after a three-year hiatus, following strained relations between the two countries over broader issues.

What happened between China and Australia?

Relations between China and Australia have been strained since 2018 when Canberra banned Huawei Technologies from its 5G broadband network.

The relationship deteriorated further in 2020 after Canberra called for an international investigation into the origins of COVID-19, which led to a series of trade reprisals by Beijing on Australian exports.

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What products are affected?

Apart from coal, exports of barley, beef, cotton, wine, lobsters and grapes were subject to varying restrictions during 2020.

However, China continued to purchase large quantities of iron ore, wheat and liquefied iron.

What did the rebellion involve?

China has given verbal instructions to buyers to avoid Australian commodities such as coal and cotton, and has imposed anti-dumping duties on barley and wine.

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An order in October 2020 to avoid coal from Australia sent prices down and left dozens of ships stranded outside Chinese ports. Beijing later said it found coal imports failed to meet environmental standards.

What products were the hardest hit?

Anti-dumping and subsidy tariffs on both barley and wine, applied for five years, all but wiped out imports of the products.

The total tariff on barley was 80.5% while the tariff on wine was 218% for some brands.

Wine exports to China, formerly Australia’s largest market, fell by $844m in the year to March 2022, the first year after the final tariffs were imposed.

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Barley trade with the world’s largest brewer was previously worth between A$1.5 billion ($1.01 billion) and A$2 billion a year.

What about other merchandise?

China also ordered cotton mills to stop buying Australian supplies or face a 40% tariff. China was the largest buyer of Australian cotton, accounting for about 60% of its supply, worth around A$900 million during the 2018-2019 crop season.

Five of Australia’s largest beef manufacturers have also been suspended from exporting to China in 2020 for reasons such as poor labeling and contamination with a banned substance.

Although other plants are still allowed to ship to China, importers have complained of long delays clearing Australian beef through customs. The trade value was A$3 billion in 2019.

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Meanwhile, lobster exports plummeted after Chinese customs said they would be subject to enhanced inspections.

Has it affected the Australian economy?

Despite the measures, Australia continued to record a trade surplus with China thanks to higher commodity prices, particularly iron ore.

Australia has also succeeded in shifting exports of coal, barley and other products elsewhere.

Barley growers also reduced the acreage under grain and planted more canola instead.

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Australia’s largest wine company, Treasury Wine Estates (OTC:), has shifted its strategy to produce wine in China to rebuild businesses decimated by tariffs.

Goldman Sachs (NYSE:) said in a Jan. 6 note that the overall economic impact of easing restrictions, while positive for affected sectors, is likely to be small.

Who benefited?

South African winemakers have seen a boom in demand, while barley exports from France, Canada, Argentina and Ukraine to China have soared.

Cattle farmers also benefited from the United States, as China sought an alternative supplier of high-quality grain-fed beef.

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What prompted the resumption of coal purchases?

Relations between Beijing and Canberra have improved following a shake-up in the Australian government, highlighted by a meeting between the two countries’ foreign ministers in Beijing last month and letters between the two leaders.

Australia hopes China will also ease other import restrictions. Trade Minister Don Farrell said in late December that he was willing to visit China to talk about Beijing’s restrictions on barley and wine, currently the subject of an Australian complaint to the World Trade Organization.

($1 = 1.4797 Australian dollars)

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Ease of landing and reopening by Reuters

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© Reuters. FILE PHOTO: FILE PHOTO: People walk past a screen showing a Hang Seng stock ticker outside the Hong Kong stock exchanges, in Hong Kong, China July 19, 2022. REUTERS/Lam Yik // File Photo

Written by Jimmy MacGyver

(Reuters) – A look at the day ahead in Asian markets from Jamie MacGyver.

Asian markets are set to open the week with spring in stride Monday, bolstered by a rally on Wall Street on Friday, mounting hopes for a soft landing in the US, and optimism surrounding China’s reopening after the ‘zero Covid’ policy came to pass. End of this week.

Investors took Friday’s ‘Goldilocks’ US employment report as a sign that the Fed may win its battle against inflation without doing too much damage to the economy – US and global stocks, assets and risky bonds rose, which is likely. To set the tone in Asia on Monday.

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MSCI Global Equities – https://fingfx.thomsonreuters.com/gfx/mkt/lbvggorymvq/MSCIGlobal.png

The relatively bland US backdrop — economic activity and inflation slowing enough to allow the Fed to end its rate hike cycle soon, and perhaps even reverse it later this year — is enough to spur investors’ appetite for risk.

Throw in increasingly positive signals from China, and the bulls could lead the charge on Monday.

Travelers (NYSE: ) began flocking to mainland China by air, land and sea on Sunday, as Beijing opened borders that have been virtually closed since the start of the COVID-19 pandemic.

Beijing’s sudden shift has led to huge waves of infections, but investors are hopeful that reopening will eventually pay off economically. China is in talks with Pfizer (NYSE:) is on a vaccine, and economists at several major banks are revising their GDP growth forecasts for the second half of this year.

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– Out and Wild – https://fingfx.thomsonreuters.com/gfx/mkt/byvrlroneve/CNY.jpg

The increasing upward trend is reflected in China’s exchange rate. The yuan is its strongest since mid-August, as it moved further away from the 7.00 level for the dollar.

Hong Kong tech stocks have been on a tear lately – up a staggering 65% from an October low – but could open on a more cautious note Monday after news that Ant Group founder Jack Ma will relinquish control of the fintech giant. .

Analysts are divided on whether this clears the way for the company to revive its IPO plans, or will lead to further delays.

There is little economic data out of Asia on Monday, but the flow picks up later in the week. Among the key events to watch: new loans, consumer and producer price inflation, and trade data from China. Australian and Indian inflation and current account and Tokyo inflation figures from Japan.

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The South Korean central bank is also expected to raise interest rates by 25 basis points on Thursday, to 3.50%. Policymakers are divided on where the final interest rate should be – three out of six in November saw 3.50%, and two saw probability at 3.75%.

Three key developments could provide more direction to the markets on Monday:

Federal Reserve Chairman Bostic speaks

— Japanese Prime Minister Kishida meets French President Macron

Unemployment in the Eurozone (November)

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Pakistan’s Finance Minister Meets IMF in Geneva as Bailout Stalls By Reuters

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© Reuters. FILE PHOTO: The logo of the International Monetary Fund is seen outside the headquarters building in Washington, US, on September 4, 2018. REUTERS/Yuri Gribas/File Photo

Written by Gibran Nayyar Bashimam

ISLAMABAD (Reuters) – An International Monetary Fund (IMF) delegation will meet Pakistan’s finance minister on the sidelines of a conference in Geneva starting on January 9, as Pakistan struggles to restart its bailout programme, an International Monetary Fund spokesman said on Sunday.

The lender has yet to agree to release $1.1 billion that was due to be disbursed in November last year, leaving Pakistan with only enough foreign exchange reserves to cover one month’s imports.

“The IMF delegation is expected to meet Finance Minister (Isaac) Dar on the sidelines of the Geneva conference to discuss outstanding issues and the path forward,” an IMF spokesman said in a message to Reuters.

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The conference in Geneva, co-hosted by Prime Minister Shahbaz Sharif and UN Secretary-General Antonio Guterres, will seek to galvanize international support for the country in the wake of last year’s devastating floods.

The floods killed at least 1,700 people and caused billions of dollars in damage to critical infrastructure.

The plan setting out a timeline and funding for the rebuilding effort has been a sticking point in talks to articulate a ninth review that would unlock $1.1 billion in IMF money and unlock other international financing as well.

Dar recently criticized the International Monetary Fund, saying publicly that the bank was acting “abnormally” in its dealings with Pakistan, which entered its $7 billion bailout program in 2019.

An IMF spokeswoman also said that its managing director, Kristalina Georgieva, had a “constructive conversation” with Sharif regarding the Geneva conference and supported Pakistan’s efforts to rebuild.

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