Davos Debrief.

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12 Hay Hill once again hosted London’s favourite post-Davos event. Organised by the FT and sponsored by Bank Pekao, there were three sessions in which a range of top figures from finance, business, and journalism discussed how the economy is being — and will be — affected by the forces of disruption rattling across the globe.

After a sumptuous breakfast spread downstairs, attendees headed up to the fourth floor lounge for a prompt 9am start, where 12 Hay Hill Director Stephanos Issaias welcomed everyone to the day.

The first session was titled Economics and Markets, chaired by Chris Giles, the Economics Editor of the FT. The emphasis of the debate was to be on how growth can be sustained in the face of political and technological disruption. As it turned out, politics — and the global economy — took pride of place in the discussion.

Chris Giles introduced the panel and announced that Davos was reported this year to be ‘flat’. (He did say later, though, that every year he found people being seriously glum in January, no matter the financial outlook.)

Although the numbers don’t point to any serious downturn, the general feeling remains downbeat and pessimistic. The US sees Iran, North Korea, and the state centred economy of China as the big problems they face. In terms of risk, although climate and inequality were raised as significant issues, no telling decisions were made to reduce their impact.

Chris then introduced the panel. During the debate, use of the sli.do app was encouraged to respond to surveys and to ask questions. The first survey revealed that Brexit — perhaps predictably — was the major issue currently affecting business confidence among attendees. This was followed by 66% responding that they believed a global slowdown was on its way.

The panel for this talk featured:

Gavyn Davies — Chairman, Fulcrum Asset Management

Helene Rey — Lord Bagri Professor of Economics, London Business School

Elina Ribakova — Visiting Fellow, Bruegel

Martin Wolf — Chief Economics Commentator, FT

Martin said that, although many sympathise with current American trade aims, they disdain the approach they’re taking.

Gavyn said that the rate of slowing down is greater than the IMF data would indicate. More than that, it continues to slow. It’s debatable whether policies can reverse this trend. In the US, the outlook may depend on wage rises and whether a continuing overheating economy forces the Fed to become more hawkish.

Elina wants a change of approach in thinking. Things are now about geopolitics and national interest and how that feeds into the global economy. China is a real threat to US economic hegemony and security and it could be that the US turns its back on multilateral trade agreements. If it starts to feel that these are no longer to its advantage, it will start to set up bilateral deals.

Helene spoke of how France is bucking the trend with both fiscal expansion and the fact that the level of inequality has not increased in the past decade. She then spoke of how Italy was changing dramatically in the face of the downturn. Before, although the north and south were split in terms of wealth, the country remained unified through the influence of both the Communist Party and the church. Now, north and south are split by politics.

Martin said that China has a demand deficit but the macroeconomic levers available to raise growth will lead to economic imbalance. This worries them. China is not in any way insolvent but they have long term structural problems that are exacerbated by the short term fixes they put in place to counter things like the recent trade barriers imposed by the US.

Helene said that the flow of capital last year underscored how crucial the dollar remains as the global exchange currency. The Fed is embarking on a tightening cycle which will affect countries with a deficit. It’s clear to Helene that there is a correlation between the tightening of the dollar and a trade downturn.

A quick survey on the app resulted in an even split for the question of whether trade tensions will escalate or subside in 2019.

Wall of money is so large that investment decisions based now on what Blackrock are doing. Elina says that asset managers grew enormously as a result of regulation on banks. Martin thinks this is better than relying on the liquidity of banks

Discussing how central banks would react to the next downturn, Martin suggested that, although there are options over and above quantitive easing, those options have technical side effects and will be politically difficult. He also believes that the Fed will refuse to go negative on interest rates.

Gawyn, on the other hand, believes that what is likely to be a demand recession means that central banks will struggle to use their normal tools. He thinks a fiscal stimulus will be a likely result, although this is often deemed to be an inflationary move.

Helene thought that a way to implement negative interest rates — especially below 1% — would be to get rid of high denomination notes to prevent people from hoarding cash.

The discussion then turned to Brexit.

Martin was astounded by how extraordinarily little planning had been done for leaving, with or without a deal. He believes that there is a need for a long extension past the end of March in order to debate the deals necessary around a no deal exit.

Helene said that Brexit is simply not high on the news agenda in France. She believes that the UK seems to overestimate its power in the negotiations.

Elina believes that the EU is unlikely to offer extensions because that would be seen as weakening their negotiating position. Some extension might be possible if there was a focus on a single issue.

Gavyn responded to Elina by suggesting that the amount the EU would lose from their budget on Brexit was not insignificant. That made the UK’s bargaining position stronger than many think.

Chris brought the debate to an end and reminded everyone that the next session started at noon.

Session Two

The day’s second session was called “Geopolitics” and was scheduled to be a discussion on how the election of Trump, the vote in the UK to leave the EU, the growth of China’s economic power, and the dangers of de-globalisation signalled a possible return to the bad old days of the 1930s.

As is the way with such things, the discussion centred mainly on China and Brexit and the 1930s didn’t get a look in. This didn’t detract from a lively debate, though.

The Chair for this session was Gideon Rachman, the Chief Foreign Affairs Commentator, at the FT. Before introducing the panel for the debate, Gideon offered a quick review of what he called this year’s “slightly strange Davos”.

This feeling was prompted primarily by the absence of the political big beast. The Trump establishment was embroiled in lock-downs, Theresa May in Brexit, and Macron wrestling with Les Gilets Jaunes. On the plus side, this made Davos a lot more pleasant to navigate in the absence of security details.

Without Trump as the main act on the first day, the privilege fell to David Attenborough instead. Climate was given centre stage, as well it should, but for the event as a whole, the two big topics hanging over every conversation were Brexit and the growing US-China trade war.

A lack of big political stars doesn’t spell the death of Davos but for the first time in a long time, there did feel to be no political or technology heroes to drive the conversation.

The panel for this debate featured:

John Chipman — Director-General and Chief Executive, International Institute for Strategic Studies (IISS)

Miranda Green — Deputy Opinion Editor, FT

Denis Staunton — London Editor, The Irish Times

Asked what he thought was the most important geopolitical influence of the moment, John plumped for the continually changing belt and road initiative from China. He gave the example of a huge investment in an unnecessary port in Sri Lanka that, when the government could no longer manage the repayments, China took over on a 99-year lease.

And Malaysia is a sign of a backlash when it calls China’s offer of a 22 billion dollar loan as new colonialism. At the same time, China’s most crucial strategy is via the new digital Silk Road. The relationship between the Chinese government, Huawei, and network infrastructure in many countries is something getting closer scrutiny.

GCHQ in the UK has examined Huawei’s codebase and told the company to upgrade it — at a cost of 2 billion pounds. The fact that the Chinese accepted the bill shows their eagerness to remain in the UK.

Gideon commented that if the US and China relations continue to deteriorate, companies will need to make a choice about Chinese technology — and other supply chain partners — when the US starts putting pressure on them.

And then, just like that, we were onto Brexit. Miranda thinks that May’s terrible strategy negotiating in both the UK and the EU may actually end up working. But, even should it work we will have arrived wherever we end up via a disastrous route that will have damaged relationships with the very people with whom we want to trade. The Commons too has acted poorly throughout the process. “A Bayeaux Tapestry of inadequacy” was Miranda’s splendid phrase to describe the complete lack of leadership and purpose shown by the great majority of MPs.

And last night Prime Minister May made the choice to compromise with the Tory right flank rather than across the House. Strangely enough, polls tend to show that, as the Commons has moved away from notions of compromise about Brexit, the public is moving towards it.

Dennis was asked if there is a chance of compromise on a backstop. He thinks that the things that happened in the most recent Commons vote means things have changed. A change to the backstop is mooted, along with a rejection of an extension. May’s problem is that she can’t say what the alternative arrangements for Ireland involve.

May now has to go back to Brussels and ask for what she wants — as dictated to her by her Brexiteers. Unfortunately, there is no example anywhere of any border where the proposed magic technology is available or working. But that’s now become the only issue because the Commons said that if you fix the backstop we’ll pass the deal. The Irish may now come under pressure. Ireland has played it tough because they think a no deal Brexit will be temporary.

Miranda has friends who thought that the way things have been going with the negotiations and the Commons that Brexit was likely not to happen. She believes it will indeed happen but the relationships with the rest of Europe are now damaged. Angela Merkel, for instance, is so bored with the whole issue that she can barely be bothered to answer questions about it.

John believes that even an integrated Europe wouldn’t have the strategic ability — expeditionary or defence — without UK forces and that, even after Brexit, there will be a close relationship between Europe and the UK driven by mutual need.

Gideon brought up Trump, if only to ask if he would make it through the next two years.

Dennis thinks that although Russia and Mueller etc are big news in the DC bubble, it doesn’t really play across the country as a whole. In fact, it’s probably in the interests of both the US and Democrats to leave Trump in place and see him either resign or fail to be re-elected. At the same time, the old party of the Democrats has gone and has been replaced by a younger, more left-leaning crew. The Clinton model of socially progressive but fiscally conservative Democrats no longer flies.

A question from the audience inspired debate as to how to prevent a Corbyn government. Dennis said the best way to keep Corbyn out of power would be to pay people more and to pay more taxes, which is, after all, the basis of the Labour manifesto. John said that Corbyn would be a disaster from a strategy point of view because he would have relations with authoritarian regimes, such as Madura and Putin. No doubt Saudi Arabia doesn’t count as an authoritarian regime because they buy British weapons. He also said that Corbyn would remove the nuclear deterrent. (This is not official Labour policy ad Corbyn is obliged to follow the demands of Conference.) Dennis countered that foreign policy would not be a priority and that domestic policy is his focus.

A final question to discuss was whether China could overtake the US in the near future.

Dennis thought that the US economy has proved to be remarkably robust and that China continued rise is beginning to stall.

Miranda hoped that democracy and economic success will continue to go hand in hand, a pleasant sentiment which skirts the true meaning of democracy.

John told us that China is using all elements of its hard and soft power to further ambitions. He pointed out that in 2018 China had more naval ships in the Mediterranean than did France. China continues to build huge numbers of ships and at the same time prevent ships from other nations to enter seas they believe they control. They are, in other words, the masters of double standards.

And with that, Gideon wrapped up session two.

Session Three

The third session of the Davos Debrief at 12 Hay Hill carried the slightly vague title of “The Business Perspective”. In fact, this was primarily a debate about the current political and economic climate affected mergers and acquisitions.

The Chair for this debate was Arash Massoudi, the Corporate Finance and Deals Editor at the FT. Before introducing his panel, Arash gave his impression of last week at Davos. What he called the “top story” was that the atmosphere was gloomy.

There is usually one country or technology that grabs the headlines and makes for exciting discussion. Not this year, and that made it all feel a little flat. And, of course, the political stars were absent as mentioned in session two.

Although climate change is increasingly in the news, it was the trade wars and the threat of a Chinese slowdown that were the main topics in meetings and debates. For example, in an hour’s discussion at Davos about serious business risks, a total of 58 minutes was spent on China.

It would seem that in the M&A space there is no slowdown in activity because of consolidation. The technology sector downturn in December caused no panic or even alarm among the bankers advising companies in their M&A strategy. It’s clear that a degree of sophistication is allowing them to see through temporary market movements.

One change that is affecting the M&A sector is the increasing questioning of whether maximising shareholder value should remain the dominant driver for mergers.

The Panel for this debate featured:

Jennifer Dunstan — Partner, Head of Fund Investor Relations, 3i

Michal Krupinsk — CEO, Bank Pekao

Roland Turnill — Head of Mergers and Acquisitions Practice, Slaughter and May

David Isenegger — Group Head of Staff and Group Head of Mergers and Acquisitions, Centrica

Arash invited Michal – from event sponsors Bank Pekao – to give his impressions of Davos and what it told him of the state of banking.

Michal thought that the biggest change from 2018 was the vanishing of what had been a mood of unprecedented optimism. With regard to Brexit, he believes that with the UK leaving, countries like Poland will miss help driving through market reforms. Talking to bankers at Davos – and more widely – Michal believes there’s still a need for further consolidation across many sectors, especially in the face of disruptive technologies and even the ability of smaller countries to generate new ideas and way of working. It would appear that mega-sized deals are increasingly likely. Finally, he believes banking as a sector should be less worried about FinTech and more about JVs where technology company align themselves with new delivery methods or disruptive business ideas.

Jennifer said that M&A activity has slowed perceptibly since the Brexit vote. Opportunities remain, however, especially in technology. Nobody can neglect how much disruption continues across all sectors and there is a tendency to try to protect yourself against competition by buying a rival. It remains dangerous to invest sometimes without good knowledge – and good advice – because it can be easy to invest in something that is very quickly overtaken by the new.

Jennifer also made the point that it’s easy to underestimate the impact of Brexit when trying to make business deals. In the eyes of foreign investors or potential partners, we look shallow or even a little foolish.

Roland believed that it was economics rather than politics that was causing any downturn in that last quarter of 2018 and which was still continuing. Looking ahead, he worries that some of the political issues coming to the fore will catch up with the economics and exaggerate any existing negative impact.

Arash added that some big deals are now being blocked by regulators. He also told us that George Soros at Davos had surprised some by applauding the Trump administration’s attacks on the Chinese business model. Meanwhile, the UK is currently looking to strengthen competition rules.

This led to a brief discussion on shareholder versus stakeholder value. The recent denial of the Astra Zeneca bid in the UK highlighted a change in emphasis, with the social aspect becoming as important, if not more so than a simple estimation of the potential shareholder gains. Roland made the important point that, legally, it is the role of a director to ensure shareholder value but a change is definitely coming and there will be increasing transparency needed around reporting societal and stakeholder benefits.

This will have an increasing impact on M&A activity, with some transactions simply not happening, either because governments step in to block them or because the parties involved recalculate the risks. Moving into countries with dodgy human rights records, for instance, or where large redundancies will be a result of the merger, are likely to cause concern.

Climate change was introduced to the discussion and Arash asked David what conversations he had heard at Davos. David said that climate change came up often enough, it was energy sector disruption that was the main focus. Questions of how soon batteries and renewables would replace traditional energy, for example.

This was coupled with concerns about sunk investment and the possibilities of government intervention. Climate is important to Centrica but the focus is on helping customers control and monitor their energy use. It’s hard for one company to lead the way when the UK government doesn’t seem to be able to decide what the energy policy should be in the face of climate change.

It was agreed that tackling climate change needs a sense of collective responsibility across many businesses in the same way that a group of US companies are looking to tackle health insurance, first for their employees, and then to roll it out more widely if it proves successful.

A final question from the floor asked that, if the global elite – as represented at Davos – couldn’t come up with answers– or even the start of a plan – to the climate crisis, are they the ones that should be leading businesses or our countries?

A tough question that David was brave enough to answer. He admitted that the problems seemed not only intractable but that it is hard to envisage the full scale of the consequence perhaps in thirty years. Making decisions for that timescale is hard.

And on that rather sombre note, time was up and the attendees headed down to the luxury of the 12 Hay Hill bar for a light supper and drinks at the end of a rewarding day.

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