After a long few months when the delta variant made Southeast Asia one of the world’s worst-hit virus hotspot, at last, there is a light at the end of the long Covid tunnel. Malaysia, along with many other countries around the world, is now learning how to live with the virus – to live in an endemic world.
The potential ramifications for investors are huge – a return to normality; but I see a return filled with significant risks.
What are the risks?
While the continued spread of the delta variant will not hopefully lead to more extreme lockdowns, it will lower economic growth. Just recently, the International Monetary Fund warned that the global economy remained “hobbled” by the virus. That’s the straightforward news – the ‘good’ news if you will.
The other problem is a lot more complicated – momentum in the world’s two largest economies, the US and China, is slowing. Yes – partly due to the effects of Covid. But I believe it has also to do with our fight against climate change. The world is far behind in its efforts to prevent catastrophic climate change with many countries being urged to quit fossil fuels.
So, what has saving the planet got to do with the economy?
Well, recent events in China may be a good indication of what lies ahead for all of us. China has been cracking down on dirty coal – shutting down small and inefficient mines and putting restrictions on coal production. Shrinking coal output, in turn, drove up coal prices.
In the case of China, where electricity prices are capped, utility companies chose to stop producing electricity rather than to produce electricity at a loss. Factories inevitably had to shut down because they had no electricity. Supply chain was further disrupted and prices may well go up – leading to Inflationary pressures. And even if electricity prices aren’t capped, we end up in the same place. Electricity companies raise prices. Factories, in turn, raise prices to their customers who also raise prices for their goods. Inflationary pressures.
And that’s not all. Even without the increase in fossil fuel prices, there still is a huge problem. Many industries like steel, printing, textiles, wood, chemicals, plastics and goods manufacturing need to find ways to reduce their energy footprint. Again, using China as an example where the government imposed electricity usage restrictions on energy-intensive sectors in its fight against climate change, prolonged factory closures will result in reduced output and supply chain pressures. The path still leads to inflationary pressures.
Not surprisingly, this sequence of events led to China abruptly reversing its recent efforts against climate change. So much for fighting climate change.
Is there hope?
If we are to win this battle to save our planet for our children and future generations, the net zero emission agenda makes it very likely we will see and have to stomach similar disruptions in future – not just in China but around the world. And, scientists say that we really can’t afford to delay any longer a concerted and meaningful effort in reducing emissions – if we want to have a chance at preventing catastrophic climate change.
I did say it was complicated. While I desperately hope that governments around the world have the courage to do what is right for their people, their future citizens and for the planet, my confidence is not high at all – vide China. But – if my wish comes true and governments have the courage to do what is right for the planet and for future generations, the markets will be in for a rough ride over the next few years as governments fight hard to win the climate change battle. However, even if my cynicism is correct, the markets will likely be volatile as climate change increasingly wreaks havoc on countries and their economies.
In this uncertain world, the role of gold for the average investor becomes even more compelling – whether it is as a hedge against inflation, against adverse currency movements, or against financial and political turmoil.