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Three Nobel laureates discuss trade and trends

Top economists visiting Hong Kong argue there is no clean solution to the trade war and assert that investment opportunities lie in new technologies and social preferences.
Michael Spence, Robert Merton, Bengt Holmström and Yifan Hu (UBS GWM)

China’s rapid economic and technological growth has inevitably caused tensions with the US administration, which sees a rising threat to US global hegemony, agreed three Nobel laureates in economics at a media briefing today in Hong Kong hosted by UBS.

Michael Spence, professor in economics and business at NYU Stern, believes that the two competing nations might be able to reach agreement on a “subset” of the dispute, encompassing issues such as intellectual property rights, state subsidies to industrial sectors and opening of markets to each other’s goods and services.

“These are issues that can be remedied on both sides,” he said

However, it will be much harder to resolve a more fundamental, underlying problem that will continue to strain relations, and could potentially worsen.

Spence sees a dichotomy between the increasing spread of new technologies – especially digital technologies – for personal use, which is inherently neutral and therefore should be open to free competition, and their adoption for national security purposes, where governments will inevitably look to exercise control and erect barriers.

“It is difficult to reconcile these dual functions and trends, so even if the headline issues are resolved, there will be residual tensions in the relationship between China and the US,” said Spence.

Robert Merton, professor of finance at MIT Sloan School, pointed out that it is impossible to forecast the timing of any resolution of the trade dispute.

“The dispersal of probabilities for each of three scenarios is too wide,” he said, highlighting the similarities of expectations in a UBS assessment for “no resolution, an early resolution and a resolution before the US presidential elections”.

“But, I’m confident that the world’s two largest economies will figure out a deal,” said Merton.

“On the other hand, even following an agreement, new vulnerabilities are likely to be identified, new walls erected and so resources will be diverted in response to meet them,” he added.

Merton suggested that widespread discussions about displacing the US dollar as the sole reserve currency is an obvious example of the fluidity of contention and response that might mark the relations between China and the US in the future.

Bengt Holmström, professor of economics at MIT, added that the loss of trust between the two rivals might lead to a “de-coupling” of supply chains; in effect a separation into discrete economic and commercial blocks with different standards, processes and behaviour.

Riding the storm

The Nobel laureates’ cautious outlook extended to their investment strategies.

Holmström warned that the major central banks might be be postponing a recession now, only for it turn out worse further down the line. At the same time, their control of monetary policy is no longer complete, with the rise of a “shadow banking system that is driven by collateral, not cash”.

Spence argued that investors can, nevertheless, ride out the uncertainty of the immediate outlook for the US and global economies by focusing “on sectors that will grow and prosper regardless”, such as in fintech and healthcare, and in parts of the retail sector where digital technology is transforming business models and changing consumer behaviour.

“These areas should be relatively insulated from global fluctuations,” said Spence.

Holmström also advised investors to concentrate on future trends, most particularly embrace the messages delivered by social movements as indicative of the preferences and demands of the young generation – exemplified by the “climate change movement”, vocalised by his “near compatriot”, Greta Thunberg.

Merton was perhaps more pragmatic than his fellow panellists.

“In this uncertain environment, protect yourself against risk, either through portfolio diversification or through buying insurance [with derivatives],” he said.

“Most importantly, remember that a great company might not be a great investment if you pay too much for it. Price matters.”


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