Despite events that seemed likely to escalate uncertainty, 2017 was a year of low volatility, solid economic growth and the relentless rise of the stock market.
But, the inauguration of an “unprecedented president” in the U.S., his “dystopian” inaugural speech and the beginning of planning for the United Kingdom’s (UK) exit from the European Union are likely to be more disruptive in 2018, according to Kevin Kajiwara, an advisor to Fortune 100 CEOs and major institutional investors on geopolitical and policy risks, as well as a speaker at the Institute’s recent Investment Advisor Forum.
These developments are contributors to the most significant event now playing out on the world stage. According to Kajiwara, that is the relative decline of U.S. hegemony, the relative rise of another hegemon (China) and the diminution of the institutions that have underpinned the world economy and political order since World War ll.
U.S. hegemony is in relative decline in that other countries – notably China – are challenging the U.S. in economic strength and influence. Chinese President Xi Jinping’s appearance at the World Economic Forum last January, a first for a Chinese leader, and his speech extolling the virtues of free trade were emblematic of the seismic shift underway.
One of the crucial questions about the years ahead is whether the U.S. will defend the system that it built and supported in the last 70 years, and that has been the foundation of globalization – the International Monetary Fund, The World Bank, the United Nations, the nuclear nonproliferation regime, and the precursors to The World Trade Organization.
“This [these institutions] has set the stage for multinational companies being the major economic actors in the world. That’s increasingly being challenged by the rise of China,” Kajiwara said. “The shift in the power balance will cause turmoil, but, not armed conflict between the major powers.”
Another key question that will hang in the balance in 2018 is whether other European countries will follow the UK with their own Brexits.
In 2017, the Netherlands, France, and Germany did not go for populist extremists in national elections, although these groups seemed to pose threats.
Despite French President Emmanuel Macron, German Chancellor Angela Merkel and Dutch Prime Minister Mark Rutte prevailing, giving some measure of policy certainty, there is a “false sense of security” in this because “populist forces have shown they can have influence without winning elections,” remarked Kajiwara.
There will be a “complete scramble” to determine how exactly the UK’s Brexit will occur as a specific plan must be developed by the third quarter of 2018 to set the stage for implementation in 2019.
Other factors that will contribute to uncertainty this year will be North Korea, which Kajiwara called a “wild card.” And, Russian President Vladimir Putin will continue his campaign of interference, driving wedges between the U.S. and its allies and internally.
In the face of considerable uncertainty, advisors can best help clients by acknowledging the uncertainty and keeping themselves and their clients as informed as possible about developments.
Despite the grave challenges the U.S. faces, Kajiwara gave some cause for optimism. The direction of the U.S. is not set solely in Washington, he noted. It’s also set in Silicon Valley, Hollywood, New York City, and elsewhere. The U.S. also derives strength from a system that, “favors iconoclasts,” he said, noting that someone who drops out of Harvard with a great idea, can excel (presumably referring to Bill Gates and Mark Zuckerberg) and someone who fails can get back up again and get a second chance.
“Couple that with the U.S.’s scale and wealth and there’s a greater possibility of the next Apple or Google to come out of the U.S. than anywhere else,” he concluded.