Globalisation 2.0: More inter-connected, inter-dependant & volatile

It’s August 2015, an arduous uphill climb since the heady days of the tumultuous financial malaise of September 2008, yet collectively both developed and emerging markets have persevered and somewhat prevailed despite incessant headwinds since the last financial crash.

Today, the plummeting markets from trading floors in China to the U.S. sound the much larger alarm of a global financial rout of the pedigree experienced in 2008. Despite no implicit dangers such as toxic real-estate assets that paved the way to 2008, a much more intricate web of inter-dependancies are in operation, highlighting the increasingly interwoven dynamics of todays Global economy.

Compounding this, volatility is also at an all time high since 2008, rising north of 40 points on the VIX index. Today’s global capital market pummelling is clearly a function of several factors which are different in nature from the domino effect caused by the US housing crises of 2008.

Rising Volatility

VIX Volatility Index

 

China in various shapes and forms is a predominant driver. By many estimates, economic growth within mainland China is stalling for 2015 with estimates varying within the 2–7% of GDP range. International brands and multinationals have increasing commercial dependance on the Chinese market. The rising demand and growth across consumer sectors for Luxury, Technology & Automotive products implies that sales of international brands (e.g. Apple, BMW, Tesla, Prada) will correspond with the internal Chinese economic momentum. The recent slow-down of growth in China, compounded by internal equity market crashes, yuan currency devalutation and the rise of internal substitutes (e.g. Xiaomi vs. Apple), highlights the fact that many Chinese economic fundamentals are having a tangible effect on the global economy. Turbulence in China is felt globally.

  Dependence on Global Exports to China

Dependence on Global Exports to China

The Luxury sector in particular is demonstrating double-digit revenue and sales contributions from the Chinese consumer demand for high-end goods and increasing conspicuous consumption.

  International Luxury Brand Sales via China

International Luxury Brand Sales via China

A less tangible function is the impact of consumer confidence and psychology which is often emphasised by behavioural economist and Nobel Laureate Prof. Robert Shiller which highlights the fact that human emotions and “animal spirits” impact capital markets in the form of fear or greed (depending on the bull/bear nature of the current cycle). Recent international market dips are therefore also largely a function of dormant concerns which become a catalyst for the panic selling which trigger sudden routs. The guidance from many fund managers is that panic is not a strategy. Simply stay calm, think long-term.

Finally, after the key driver of market interdependence (particularly China plus emerging markets), coupled with human emotions contributing to the global economic trajectory, we are now living in a real-time, data-driven global economy where 60% of the worlds population is connected to the internet (approx. 3 billion). The implications of this ever-growing “digital” population is giving rise to innovation which increases financial market speed, access, accuracy and therefore volatality. As financial technology instruments based on indexing as opposed to traditional hedge funds (which is an example of automated vs. manual trading), or algorithmic trading (which gave rise to the flash crash) and even decentralised currency (such as Bitcoin) proliferate, the cyclicality of global economies will intensify. However more than ever, we live in an era with more opportunity than previous generations to negate busts and enhance booms via this intricate web of global markets, emotions and technology.

 Rise of indexing, automation & algorithmic trading in financial markets

Rise of indexing, automation & algorithmic trading in financial markets

As the late Steve Jobs would advise, we must “Stay Hungry, Stay Foolish” while staying calm and thinking long-term despite the increasing volatility of an intricate interdependent global context.