London, New York, Singapore, Hong Kong and Tokyo remain the top five financial centres in the world, according to Z/Yen’s 21st Global financial centres index (GFCI21), produced in partnership with the China Development Institute (CDI) in Shenzhen. 

Despite their position at the top of the list of 88 global financial hubs, Brexit and the US election results have taken their toll on London and New York, which fell 13 and 14 points respectively. “We live in uncertain times and financial professionals hate uncertainty,” says Mark Yeandle, associate director at the Z/Yen Group and the author of the GFCI. “Brexit has caused uncertainty in Europe and the election of Donald Trump has caused uncertainty globally.” 

Western countries show something of a mixed bag in the index. Financial centres in western Europe are still unstable: 16 of the 29 GFCI centres analysed in the region declined, while 12 rose. The US, however, fares relatively well. With the exception of New York, north American centres all moved up the rankings.

“The gradual phasing out of easing monetary policies in Western countries may have significant impacts on the structure of global financial markets, we need to monitor this closely,” says Professor Fan Gang, president of the CDI.

In the East, the competition is hotting up. The gap between Singapore and New York continues to close, with the former increasing by eight points, while all other leading Asia Pacific financial centres crept up. Beijing, significantly, is now within the top 20 centres worldwide, and China’s position is only set to grow stronger due to “the reform of the financial regulatory framework, launch of the registration-based IPO system, evolution of fintech and the robust growth of the Chinese economy”, says Jiang Jianqing, president of CEIBS Lujiazui Institute of International Finance and chairman of the China-Central Eastern European Fund.

Global financial centres index report
Trading troublesThe correction of excessive trade imbalances could have a positive impact on global economies going forward, writes CNBC’s Michael Ivanovitch. China, Europe, Japan and South Korea accounted for 81% of America’s trade deficit in 2016, selling $943.3bn more goods than they purchased from the rest of the world. Recent G-20 economic summits have been warning of these “depressing and destabilising effects” on the global economy, says Ivanovitch. In response, President Trump has called for the application of international trade adjustment rules.

According to Ivanovitch, China appears prepared to correct the “unsustainable trade relationship with the US”, pledging to “keep its economy open and to increase imports by $8tn over the next five years” at the recent Boao Forum for Asia.

Europe, on the other hand, may pose more of a problem – with Germany at the heart of it. “Germans are threatening an EU trade retaliation against the US,” writes Ivanovitch. German economic policies have a critical effect on European growth and employment, with the country holding the key to “22% of America's exports to Europe”. Germany’s trade surplus of €168bn, which “it draws from its closest trade partners” – plus the fact that Europe gives Germany “66% of its total net exports” – is dragging the region down.
81%
The percentage of America’s trade deficit accounted for by China, Europe, Japan and South Korea in 2016
“The best hope for Europe [which accounts for approximately 20% of global GDP] is that the European Central Bank (ECB) continues to offset some of the damage done by Germany with an appropriately supportive monetary stance,” says Ivanovitch. 

Despite the European issue, prospects for America's trade policy review with Asia are positive. A reduction of the $650bn trade surplus held by China, Japan and South Korea would provide a significant boost to global output and employment.

CNBC article
A new perspectiveWhile many believe that political issues will shape global financial markets and economies going forward, Paras Anand, CIO Equities, Europe, writing for Fidelity International, notes that political “black swans” are “overshadowing the important trends of a reduction in systemic risk since the global financial crisis (GFC) and the relentless onward march of technology.”

According to Anand, there have been three chief systemic risks since the crisis: political contagion, “specifically the spread of populism”; sentiment contagion, “mainly the belief in stagnation”; and economic contagion, “the scope for a crisis in one economy to lead to demand destruction in others”. Real economic contagion – which attacks highly leveraged and tightly interconnected weak points in the financial system – has been the most concerning issue in recent years, which “largely explains why top-down analysis has taken centre stage”. However, since the crisis, aggregate leverage and interconnections have fallen, which – in Anand’s opinion – should have brought politics and macroeconomic events into greater perspective.
 
“There are many negative outcomes that investors fear, but constantly labelling events as black swans gives those outcomes an unwarranted status,” he says. 

Technology is also an incredibly important – but sometimes overlooked – factor. Technological developments are set to affect consumer tastes, wealth creation and corporate success and failure to a much greater extent than most government policies. A crucial task for investors over the next few years will be to analyse the extent to which technology will alter the business landscape, disturb value chains and open up new prospects for franchises.

“While the political environment continues to enthral most market participants, there is the scope for politically-driven sentiment swings that can provide good long-term investment opportunities,” Anand concludes. 

It is clear that, while politics will continue to play a key role in the performance of global financial centres and economies, financial professionals and governments alike must pay equal attention to the many other factors at play. 

Fidelity International article

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