A Second (or Third) Pax Sinica, or a Bellum Sinicum?

It is a truism that, with the age and sophistication of their civilization, the Chinese take the long view when it come to history and strategy. Pax Romana, Pax Britannica and Pax Americana are all terms describing an era in which a superpower exercised hegemonic control over large portions of the world. Seemingly a little less well know is the fact that there was a Pax Sinica across much of Asia and what is still referred to as the Silk Road during a period overlapping the Pax Romana, and arguably a second one overlapping the early medieval period in Europe.

Because widely read histories have tended to be written by western Europeans, and because of the dominance of “the West” over the past several hundred years, it tends to be forgotten that The Middle Kingdom, now modern China, was the dominant economic power on a global scale for much of recorded history; and that its rise in economic terms to be (depending upon how one measures it) the largest or second largest global economy, is only, as yet, a partial return to its previous relative importance.

Of course, much attention is now being given to trying to understand what the PRC’s government (i.e., the CCP) intends to do with its growing regional dominance; and how the United States in particular will respond. The outcome of that relationship is the most important longer term geopolitical question the world faces; and how it develops will determine the outcome of many other issues.

In recent decades, after its emergence from its Maoist and isolationist shell, the PRC has appeared to follow a doctrine of “Tao Guang Yong Hui”, usually and roughly translated as “keep a low profile and bide your time”. Even now, with his ambitious One Belt, One Road strategy, President Xi provides evidence of a desire to promote mutual prosperity along the old Silk Road, something to be lauded in objective terms.

However, as is also well known, there is constant tension across the South China Sea and Straits of Taiwan, as the PRC seeks to assert what it regards as its rights over a broad swathe of geopolitically vital and contentious ocean, and so clashes with most of its neighbours and others with a presence or interests in the same area (including the United States, with its recent “Pacific Pivot”.)

What is slowly becoming evident is that the PRC intends to be ever more assertive in protecting what it sees as its rights and interests, and that (as with Rome, Britain and the US before it) these can be very broadly defined and expansive, inevitably setting up confrontation with the current superpower, the US. President Xi is well aware of the risks of falling into the so-called Thucydides Trap (in which, as with Sparta and Athens) the established “power” feels compelled to react and re-assert its own rights and interests in the face of a challenger.

From Awbury’s point of view, we believe that there are great opportunities in Asia, and are partnering with a range of prominent (re)insurers based there; but we also believe that the risks posed by the scenario outlined above must be closely monitored and assessed. The Pax Romana did not end well, for Eurasia; whereas the Pax Britannica gave way to the Pax Americana without any material disruption. It remains to be seen whether there will be a new Pax Sinica or a Bellum Sinicum.

The Awbury Team

Be not afraid…

As the prices of benchmarks such as Brent and WTI remain very volatile (albeit with a bearish trend), we thought that we at Awbury should offer a few observations; not in terms of forecasting oil prices over the short term (all we know is that we would be wrong!), but in terms of trying to point out a few issues that any analyst should be taking into account in assessing the risks that arise from such an environment.

So, here goes.

– In a rational world, the dramatic fall in the price of crude oil should be an unalloyed good for economies that are net importers of oil- with India, Japan and Turkey being prime examples. Yet, in our inter-connected world, it is not quite as simple as that; because, while the lower cost of imported oil clearly benefits an importer’s balance of payments, the broader loss of confidence and lack of “petrodollars”, can reduce FDI and the appetite for assets or investments in jurisdictions seen as “more risky”. So, developed market importers seem likely to benefit more, at least in terms of perception
– It’s not just about the O&G industry. While the focus may be on the Supermajors and down the chain in terms of scale, many industries depend on “O&G” for a significant portion of their revenues, particularly in manufacturing, so one has to be aware of the risk of “collateral damage”
– The geopolitical ramifications are likely to be significant in the absence of a material rebound to significantly higher price levels. While Saudi Arabia (which we would characterize as a “brittle” regime) may be the low-cost producer, it has created an economic framework and clientelism structure that depend on oil prices being a multiple of what they currently are, so there is a potentially existential race going on to adjust, if possible, to a radically changed world, exacerbated by the mutual antipathy between Sunni and Shia Islam
– It seems likely that there is a new “world order” being established in the O&G business, with the US shale-based production segment becoming the swing producer. The OPEC cartel is notoriously dysfunctional; and it remains to be seen whether its members can work out a way in which to re-assert some control over pricing
– Desperate people do desperate things. Regimes whose “legitimacy” and survival are threatened by the current pricing environment are more likely to take actions that may seem helpful for them, but create further instability elsewhere. And, as we have seen, mere hints of “talk” can create significant volatility. Overt actions would be likely to have a much greater impact
– Lower oil and gas prices can depress investment in “alternative energy”, and thus have an impact on the calculus of climate change
– The scale of the price decline has created dislocations in the High Yield bond markets, as investors anticipate a rapid acceleration in bankruptcies of an ever broader range of businesses, who simply do not have the ability to adapt without shedding most of their existing financial liabilities
– History tends to teach that prices can rise just as rapidly as they have declined because of some, as yet, unforeseen catalyst. As we said at the start, if we were to try to forecast the price of crude oil, we would be almost certainly wrong!

Yet, in spite of all the above, the world’s economy will eventually adapt, even if some of the changes and outcomes will be material, and perhaps unwelcome for some.

So, at Awbury, are we wary and cautious? Of course. Are we afraid? Most certainly not! Challenges and dislocations bring opportunity, as well as threats.

The Awbury Team

Will Your Business Survive?

What exactly is a corporation? What is its expected life? And how can it survive and prosper? While these questions may seem simple or even trite, we wonder how many CEOs and Directors actively consider them in the face of seemingly endless calls upon their time and attention.

Yet, if they do not do so, they almost certainly increase the risk of their own business’ demise, because very few of them are in a position to change or materially influence their operating environment, and so they must adapt to it.

The Harvard Business Revue (HBR) recently published an article, entitled “The Biology of Corporate Survival”, which should give any senior executive pause for thought. Its authors, having studied the longevity of some 30,000 US public companies over a 50-year timespan, found evidence that the probability of such a company being delisted within the next 5 years because of bankruptcy, liquidation, M&A or other reasons was one in three- a rate apparently six times higher than 40 years ago. Of course, the complacent will say: “But our company will be one of the survivors”. Why?

The HBR article’s core argument is that companies “die” younger and more frequently “because they are failing to adapt to the growing complexity of their environment”. Terms such as “globalization”, “disruptive technology” and “Uberization” are tossed around as a supposed sign of the speaker’s intellectual sophistication; but they are often uttered without any real thought as to what they mean, or whether they are relevant to a particular business.

In North America and most of Europe and Asia, businesses may no longer have to fear the direct consequences of war or invasion, perhaps the ultimate “disruption”, yet they do face constant challenges and threats. What will differentiate those who survive and thrive, from those that languish and “die”?

As the HBR article’s authors argue, in order to survive, any business has to be seen and managed as a complex adaptive system, in which how its various members (the “agents”) interact leads to outcomes that can reconfigure the entire system (called “emergence”) and generate “feedback”, which then continues the cycle. Of course, businesses do not exist in isolation, so they are always being impacted by the behaviours of other, external complex adaptive systems.

Consider the (re)insurance industry. In its accepted modern form it is not much more than 300 years old (if we taking the founding of Lloyd’s as a marker). This is, theoretically, some 10 generations; which, for its human participants may seem to provide some comfort that they face reasonable odds of “survival”. Then consider that, at an industry or functional level that may be so, but at an individual company level, that is simply not the case. Yes, Lloyd’s has survived (albeit not without a few “near death” experiences); and there are companies that proudly trace their history back almost 200 years, or even longer. However, they are the exception. In reality, the ability of any one business to survive has always and will continue to depend upon characteristics that make it “predator” rather than “prey”, or at least able to form defensive alliances that help to reduce the threat of annihilation.

At Awbury, we are students of many disciplines, as well as believing that it is important in a systematic way constantly to review and re-assess whether our strategies, products and techniques, as well as knowledge base, remain “fit for purpose. We do not see ourselves as predators (nor prey!), because we believe that co-operation and partnership are ultimately much more successful as an approach to long-term survival and prosperity; but that does not mean that we are not paranoid! Threat (and opportunity) assessment are a fundamental strand within our corporate DNA.

The Awbury Team

Of Swans, Guardians and Suns…

2016 continues to provide evidence of significant volatility in many areas, with tin hats being much in evidence as the chapeau de jour, while swans of ever-darkening hue are supposedly seen with increasing frequency.

The term “black swan” has now become a cliché, together with “unknown unknowns” and can lead to much unnecessary and fruitless intellectual effort, as well as avoidance of responsibility for the foreseeable consequences of actions, or the occurrence of identifiable tail risks.

So, consider these related questions:

– If the United Kingdom holds a referendum on whether or not to remain part of the European Union, what will be the outcome; and
– If the result is a vote to leave, what are the potential consequences?

Even a year ago, these might have seemed rather abstract tail risks, but they are not, and never were, “black swans”. While the precise timing of a UK referendum may not yet be set, it will probably happen before the end of 2016; and the wording of the single question on the ballot paper will be intended to elicit a straight “up or down”, “Yes” or “No” outcome, as the Electoral Commission has made it very clear that it will not permit a gerrymandered wording.

As the result of the Scottish secession referendum showed, polls on attitudes and voting intentions can be quite wrong in predicting outcomes. However, a recent YouGov analysis of the voting intentions of a 22,000 voter sample showed that, at present, the split of voting intentions is 51/49 remain/leave. Not surprisingly, when the members of the cohort are placed into various sub-categories, there are very wide differences. As an example, for readers of the Guardian newspaper (generally regarded as “socialist” in the European sense), the split is 76/24, while for readers of the infamous Sun newspaper it is 40/60.

Clearly, how the “Yes” and “No” political campaigns are argued and conducted is likely to have some influence on the outcome, as is what happens with and in the EU as a whole during the referendum period. In reality, it is likely to come down to whether or not, on balance, those who vote decide “better the Devil you know, than the Devil you don’t”. As the FT’s Martin Wolf has stated: …”the referendum will ultimately be decided by fear, hope and, not least, trust.”

If the outcome of the vote is “Yes”, it is likely that there will be a dampening in market and political volatility. If it is “No”, the consequences for the both the UK and the EU would seem to be mainly negative.

At Awbury, our focus is, as always, on understanding and analyzing the potential risks (and opportunities) that would flow from either outcome. For example, what if Prime Minister Cameron is compelled to resign and the governing Conservative Party fragments? Or, the EU decides to “make an example” of the UK “pour encourager les autres” in terms of how it imposes exit terms? And yet, the loss of an influential Member may well de-stabilize the entire EU, making concerns over the “loss” of Greece a sideshow, as well as encouraging secessionist forces both within and outside the UK, threatening an end to Europe that began to be created almost 60 years ago after the signing of the Treaty of Rome.

We shall be keeping a close eye on this issue; and will, no doubt, write further about it.

The Awbury Team