Patience required

Patience required

Transitions are difficult periods.  By definition, they follow periods of clear direction, they can last a long time, and their outcomes are uncertain.  Some of the most impactful transitions unfolding today are the climate crisis and the transition to a carbon-free economy, the political and economic rise of China and the change from a US-dominated order to a multi-polar world, and digital transformation and the shift from offline to online.  These long-term transitions represent global challenges that offer risks and opportunities for many years. 

What makes the current period so challenging is that we are also at a critical juncture for the Covid-19 pandemic and the uncertainty about vaccines and immunity.  The indications are that we are in a transition from the acute to the chronic phase of the pandemic.  Scientific research and innovation have delivered tests, vaccines and other therapeutics at record speed, we are better prepared to manage it, and closer than ever to overcoming it.  The global economy has weathered the crisis, many companies have delivered strong results, and markets are at all-time highs. 

Yet the pandemic itself is stubbornly persistent and we will have to deal with the reality of it for years to come. The measures we have taken to overcome it will have lasting impact too, short-term in terms of the significant shortages we are seeing in the supply of labour, goods and trade, and long-term in terms of the debt that governments have accumulated in supporting employment and economies through the crisis. 

That is why, as we assess the outlook and the risks and opportunities we face, we would do well to recall that, beyond our usual diligence and resolve, patience is required to take the right decisions.

Our Investment Insight this month links directly to one of these major transitions.  Among the best-known Chinese sayings is one attributed to Confucius: “With time and patience, the mulberry leaf becomes a silk gown.”  Earlier this year, the Chinese government adopted its 14th five-year plan.  Its objective is to achieve ‘common prosperity’ by addressing three key development gaps: the regional gap, the urban/rural gap and the income gap.  One of its biggest goals is to double the number of middle-class individuals from 400 million to 800 million by 2030.   Since then, the government has announced a number of measures to action its plan.   As a result of one of these announcements, about changes to taxation affecting primarily higher income individuals, companies in luxury, spirits and other businesses with significant exposure to high-income Chinese consumers have come under pressure due to concerns about their future propensity to consume. 

Coco Chanel once said that “Luxury is a necessity that begins where necessity ends.” China has lifted 800 million people out of poverty, the greatest example of poverty alleviation in modern history. It has not done this overnight and it has not been easy. There have been mistakes, dilemmas and trade-offs along the way. But over the past forty years, China has also had effective leadership, long-term vision, strategic patience and resilience.  It has learned from many of the difficult challenges of the past and has not been afraid to experiment, adjust and learn.

The link to the bigger geopolitical transition to a multi-polar world lies in the varied experiences of economies in the East and West, North and South.  They show that there is no single path or blueprint to prosperity. This is both humbling and reassuring. Different countries have embarked on journeys that are far from linear or straightforward in their own ways, confronting challenges and tensions that illustrate how complex and contested pathways of change can be. There are no easy answers. But the risk and the promise lie precisely in how different countries navigate through these complexities, and how they address the expectations, needs and demands of their populations.   

We do not underestimate these issues.  But the overall incentives should be aligned because ‘common prosperity’ is a goal for all countries that requires peaceful relations between states, functioning markets, rule of law and free trade among the necessary conditions for its achievement. 

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