„The situation in Europe will be very difficult for years to come. Investors shall believe in Asia, tech and ESG,” says Professor Sumit Agarwal, one of the top global experts on financial retail

We live in turbulent times. Covid, inflation, paralyzed global supply chain, the war in Europe… It is a lot to swallow and a lot of people feel uneasy. These are all big topics from which there is no escape. Professor Sumit Agarwal is a business heavyweight. Today he lives in Singapore, he was a senior economist at Fed under president Bush Jr. and managed a portfolio bigger than the national budget of Czech republic at Bank of America. Jan Ruzicka spoke with him about all the topics mentioned above and a lot more.

I can’t start this interview any other way than by discussing macro. You have been working for the Federal Reserve of the United States and for the Bank of America, plus you are a distinguished professor. Thus you have been doing macro for decades. Interestingly, macro is something that even ordinary people are now interested in, not only people on Wall Street and in business. There is inflation, the stock markets, there was a run of retail investors on Wall Street in the last two years, and there is Bitcoin and crypto in general. Furthermore, Covid implications, supply chain issues, lockdowns, closed borders, and then quantitative easing in a magnitude never heard of before. All of these are hot topics of the day. So, what would you as a macroeconomist say about the state of the global economy in spring 2022?

The global economy is now an animal with multiple heads, and you just brought up many of them to the table. Let me add a few more. There are implications of Ukraine-Russia war, then also what is happening on the stock markets, then the oil prices, as well as the housing market in multiple countries. Also, food prices. A lot of these macroeconomic variables are disturbing.

Now, where do I see major economies in the next few months and where do I see them in the medium term? I think that we are going to see persistent inflation. The main reason is that there is a huge denial in the monetary economics, and in the Federal Reserve, and the central banking community globally; they believe that the inflation is transitory. What do I mean by that? They think that inflation is now being caused by the supply chain problems, and with economies re-opening as Covid recedes, the supply chain issues will end within 6 to 9 months. And as a result, they think that inflation will come down.

Your view is different?

Yes. Their belief may have been true before the Russia-Ukraine crisis. But considering that and in light of how oil prices have moved up, I think inflation is going to be much more persistent. Another issue is that the stock market has been divorced from the inflation problem.

So, where to put the money?

A lot of people believe in crypto. But crypto can also be an issue right now. Crypto can be another place to park your money, yes, but we have seen that it has not been a reliable store of value or an alternative investment vehicle that could be a hedge against inflation. So, what are we left with right now? Housing and gold. But prices are going up in these markets as well.
All these complications in macro and in multiple asset classes will hurt the medium to lower income people more than the higher income classes because the latter can deal with inflation much better than anybody else.

Let me also mention another thing: unemployment. Unemployment will be at all-time low because there is demand around the world for travel, eating, shopping… We already know that there is a shortage of especially luxury items all over the world. From cars to watches to handbags to anything, you name it. And travel. Right now, if I walk into a Singapore airport, they have shortage of manpower to get me my tickets or shortage of people who process the luggage. So, you can see that unemployment will be dropping. Prices will be going up. Consumers will be frustrated with the fact that the economy is heating up, prices are going up, and monetary authorities are sluggish in addressing it. They will also be slow because if they clamp down too harshly, they will actually hurt the economic growth that they desperately need these days.

In the United States and especially in Europe including my country, the Czech Republic, central banks are already going up with rates. There is a big debate about it. So as a former FED economist, what should Jerome Powell do?

Everybody is raising rates and multiple central banks have committed to raising them by around 2%. But what Larry Summers and other economists say and what my own assessment would be is that the rates will have to go up much more dramatically and much more persistently. Maybe up to around 4%.

But implications for growth?

There are always pros and cons. When I was in the FED, similar arguments were made in 2007 and 2008. There were debates about how we shall respond. The problem is that whatever they do now, some of it will be anticipated and there will be a reaction to it. For example, let's say they raise the rate by 4%, which is what many macroeconomists are recommending: if you really want to tackle inflation, this is what you need to do. But that will have a significant impact on interest rates, mortgages, and credit given to corporations, which is variable rate credit. And that will have implications for the economic growth.

Now, part of that may be intended, but it will really hurt us as we are trying to come out from the last three years of a severe recession around the world. So, I think that what the FED or the central banks are doing at this point may be right. Maybe they just need to show more commitment to lowering inflation, but they shouldn’t necessarily raise interest rates more aggressively.

When politicians hear about rates going up, they always start sweating. You already mentioned a few reasons why. Don't you think that rates going up can suffocate the very fragile growth that we can now see after Covid?

This is something that creates tension between central bankers. They themselves realize that if they clamp down on the rates too much, they will hurt the economic growth. Especially as they have been doing the QE – all this monetary easing and fiscal easing – over the last 3 years and suddenly, they say that we should now stop and reverse everything. It would mean that a lot of money invested to pump up these economies would have been wasted. So, I would say that we need to let the central banks do their job instead of saying that they need to do less or more, and we should wait and see. There is a chance that if the central bankers truly believe that this thing is transitory, some of the supply chain issues easing will make the situation better. We have seen oil prices go up, but they also came down subsequently. All prices have been coming down and futures are very low. Right now, it's $90-100. The oil price should be around $60. Maybe the central bankers have some information that we don't. So, I'm trying to give you a balanced answer.

There is also a difference between the United States and emerging economies led by India, on the one hand, and Europe on the other. In the US and SSE Asia, there is rapid GDP growth. In the US it's almost 7%, in India it's more than 10%. The situation and the overall mood in the society are a bit different than in Europe where the growth is very modest, plus the war is next door. What do you think specifically about the situation in Europe?

The situation in Europe is very difficult right now and the reason is simple: there is a war. Whenever this settles or when the war is over, there will have to be reconstruction. And there will be huge expenses borne by the European Union which will have to commit to the reconstruction and do a lot of things in Ukraine. And obviously, Russia will also be dragging down many of the European economies. Therefore, I think that Europe is hit the most by the current situation. America has oil reserves, so they can release the oil reserves. They can also tap the futures market in oils where the prices are very low. Thus, America may actually benefit from the situation.

So, Europe is going to be hit the most. And I can imagine that all this will have consequences for the next 5 to 10 years – Covid, then the inflationary pressure, and then the war in their backyard.

How do you see Asia?

The supply chains that are also hitting Asia will get better over time. There is no doubt about that. And the quickly developing countries such as Indonesia, India, and Vietnam, I think they are doing fairly well. And after supply chains will reopen fully, they will be doing even better.

How about India?

India actually went a separate path in terms of its relationship with Russia than the rest of the world. They said: “Look, we are not going to take sides. We actually have to take care of our own people, which means we need oil and arms from Russia”. This means, that India will not be hurt because they're not going to participate in the sanctions.

Then, what should retail investors do? Everything is overpriced. In front of me, I have a Bloomberg article by Bill Dudley, a well-known former president of the Federal Reserve Bank of New York. Last week, he wrote a long article titled: “If Stocks Don’t Fall, the Fed Needs to Force Them”. So how do you see the stock situation?

Right now, you shall invest in developing countries. Stocks of emerging economies will be going up. Think about Vietnam or India. All of these countries where the GDP growth is marked to be anywhere from 6 to 10% over the next couple of years. I think these are the places you shall go. If you can take risk, it is of course even better. But even if you don't want to take risk and you prefer to be conservative, you can pick the top 30, 40, or 50 stocks in these countries. They will clearly be doing well compared to stocks in Europe. Europe will not be doing well over the next few years.

I think that another shift people can do is impact investing, because of the world’s commitment to sustainability. You can find companies where there is value as the focus of customers and regulators changes. If regulators are getting stricter about carbon pricing, this will have a negative effect on stocks that deal with carbon emissions. And in the future, they will be repriced or correctly priced. So taking all these things such as emerging economies and sustainability into account in your portfolio will be a big plus in the next few years.

Let me mention one more thing: technology. Technology is doing very well. I am a little bit reluctant to think about crypto because it is a new asset class. As a class, it has grown to close to $2 trillion. But it's very volatile. You can have a fraction of your portfolio in crypto, but I would recommend 1% or less. Because of this volatility.

We mentioned already multiple big emerging markets, but there is one elephant in the room: China. Over more than the last three decades, it has become a global powerhouse. Now, its situation is not easy. The country has already been closed for more than two years and it's extremely complicated to get in or out. We see Covid numbers skyrocketing in Shanghai to more than 20,000 cases a day, there are very strenuous lockdowns, three out of ten largest ports in the world (Shanghai, Tianjin, Shenzhen) are closed, and internally the economy is growing less, and less. And the prediction by the Chinese prime minister and the government is even lower. Currently, they say it’s about 5.5%. So, what do you think about the situation of China as an economy and its impact on the world?

That's a very good question. I intentionally left China out of my previous answer because it is so big uncertainty right now. This is partially due to the fact they’ve had a zero Covid policy for all these months, and now suddenly, we are seeing this huge explosion of cases in Shanghai and other cities. We can see people on the streets literally fighting for food. This is going to be a significant blow unless this pushes China to change their policy stand and say: “We are going to live with Covid and we are going to open up the economy”, which I don't see as an outcome. Therefore, I see the prospect of economic growth in China to be still low in the near future. I think they will be at 5 to 6% maximum.

But it is not just the economic growth, but the lockdown of the whole country to anything external. And there might be another two years of it. It is going to hurt trade and supply chains. As you have mentioned, the ports are closed. This is going to have very negative effects.

However, I think that market players have already anticipated that and priced that in. And they have looked for alternative suppliers around the world. Brazil, India, Vietnam, Indonesia – countries that produce substitutable goods are benefiting from the severe lockdowns and supply chain issues emerging from China.

As we are talking about the war, macroeconomics, the emerging markets, the global economy is getting smaller and more deconstructed. For quite some time, globalization has been going down south. Quantitative data are showing us that already after 2008, foreign direct investment went down globally, and global trade went down. Over the last decade already, the world has been getting regionalized. And now it's happening even faster. Ties are getting severed between the West and China, the West and Russia. There are discussions that BRICS countries will create their own SWIFT. In the area of technology, regional or even single-country ecosystems are spreading. How do you see the future of global trade as an important part of the global macroeconomy?

I think that this is a big issue. In the last 50 years, with free trade, we created a situation that was a win for the whole world. Consumers, countries, and corporations benefited from it. People could specialize, trade reduced prizes, everybody succeeded. The entire field of international trade and investment has demonstrated that.

However, there has been a shift over the last 10 years. There have been politicians around the world who turned against trade. Starting from the US where Donald Trump denounced trade and made “America First” his slogan, to countries like Turkey or India, and to some extent to many European countries where the leadership was denouncing trade or had protectionism as their big agenda. And obviously, on top of that, Covid and other factors kicked in. So, for the next 5 to 10 years, we will see this trend continue. Countries will trade strategically rather than in terms of maximizing returns for their country or for their citizens.

What do you mean by doing trade strategically but not in terms of maximizing returns?

They will engage in a trade like India right now, for instance. India says: “We will continue to do trade with Russia because that's in our best interest right now. And we will also continue to do as much trade with Australia and with America.” Every country will realize what is in its best strategic interest. No globalization, no profits in first place, but national interest. And therefore, from global trading partners, we will shift to more regional and national trade and become also more protectionist. This will have implications for economic growth and for innovation because trade allowed people to innovate. All of this will take a back seat. When will we break out of this? It's an open question because the main reason is political. Politically, people realize that challenging trade is good for winning elections.

So, do you think that globalization is being killed by populism and nationalism?


Not only the trade is being contested. Also, technology, innovation, and science are being challenged by many. We used to have a global flow of ideas...

Oh, yes, we used to...

...And a flow of university students, university professors, and so on. But now, global power of technology and innovation is currently shrinking. It started with the great firewall of China and kicking Silicon Valley out. Then prime minister Modi and his digital sovereignty of India chipped in, then Trump and America First, and so on. And this process of tech regionalism is just speeding up.

At the beginning of our conversation, you mentioned technology as one of the areas where growth can pick up again. But considering these obstacles, how do you see the role of technology in creating value, both in real economy and in the markets?

Technology is still going to be the most important factor for any country to grow. There is no doubt about that. Even if we say that we don't want to improve efficiency and create value in the country by means of trade, we will still have to rely on technology. Even countries where labour is very important will have to rely on technology. Think about India which is a poor country, or Indonesia. Protecting jobs is very important for them, but they will still emphasize technology. We have seen the advent of fintech. There is a push toward AI. And I think that both politicians and technocrats are realizing that technology doesn't have to be a substitute for labour. It can be an enabler in opening more jobs, more doors, and starting more innovations that will also require labour.

I think that if we went back to the global model, technology would do wonders. But tech is a great asset even in a regionalist worldview or in a populist mindset. Also, technology may be a key bridge towards sustainability. Because if we worry about a sustainable world, if we have an ESG perspective and are thinking about social and environmental issues, we need to innovate. Sustainability cannot succeed without more innovation.

For instance, take carbon. Carbon trading or coming up with technologies that are carbon neutral or carbon zero will require a lot of technological innovation. Tech that doesn’t exist now. And that will most likely generate jobs.

You have opened another huge topic of global macroeconomics, which is ESG. We can also call ESG as sustainability and transition to the green economy, or the European Green Deal. It is the number one agenda wherever you go. I am now in Hanoi and just this morning, I had a meeting at the State Bank of Vietnam, the local central bank. They are talking about making the economy green. The same goes for Singapore and its prime minister Lee as well as Indonesia and its finance minister preparing G20 Summit. What is fascinating about this? ESG is not only about the West. It's not only Greta Thunberg or the French presidency of the EU. It is becoming mainstream globally. If there is a single topic on which Brussels, the US, and the People's Bank of China can agree on, it's the greening of the economy.

On the other side, there is a war and the prices of the “polluting” businesses such as oil, gas, commodities, etc. are skyrocketing. They are more important than ever. We can see the role of gas in the negotiation around Ukraine.

So how do you see the role of ESG? Is it a volatile topic? We can notice pressures where people say: “Hey, maybe let's wait a little bit because we need to win the war first”, or “we need to recreate our businesses” et cetera. So, what do you think about this?

Solving the sustainability problem is a long-term issue. We should have started addressing it today, or even better yesterday, but because of various factors, people don't see the urgency. They have never been able to identify the right time, the right commitment. They have never figured out the right amount of money to spend on it, and the right messaging. But now we can see politicians making commitments. We can also see banks making commitments. Also, regulators are committing that they would enforce what is necessary. We can also see investment community committing to having a greener portfolio, a more sustainable portfolio. I think we can see all those forces, such as politicians, banks, regulators, and investment community moving in that direction. I can see that Singapore has taken leadership by saying it would raise the carbon tax from $5 to $80 in the next 10 years. Also, prime minister Lee said that Singapore would invest a hundred billion dollars in the next 100 years to protect us against the sea-level rise. We have seen similar evidence, say, in Indonesia. In Jakarta, they also said they would build a wall to protect Jakarta from the sea level rise.

We know that a lot of cities around the world, such as Ho Chi Minh City or Mumbai, will be underwater if we don't do anything. This concerns many cities; I can keep naming them. But right now, you can't build a wall in Jakarta because it would cost $40 billion.

Where will the funding come from? It must come from the private sector through loans. And if those loans are not cheap, how will you do this project? Right now, everybody focuses on the short term. They were trying to come out of Covid for which they needed to spend a lot of money through the fiscal coffers. Now, the war between Ukraine and Russia is going to cost an enormous amount of money to the world. Not because other countries must directly pay for the war, but because of the negative effect on oil prices and their budgets.

So, countries are not focusing on how to deal with the climate crisis because it's far away. They can always keep postponing the solution because they keep saying that they have shorter-term problems they need to deal with.

There is also the problem of greenwashing and a lot of people are increasingly saying that ESG is just a game, marketing, and PR. Just recently, Bloomberg has been pushing against MSCI and its indexes. At Columbia University, there is a whole narrative around Elon Musk and whether Tesla is green. A lot of people say no because Tesla is just cutting one part of the production and the usage process. Nobody is talking about lithium batteries. The same goes for Chevron and many other companies. They try to look green by hiring people to sit on their boards, but at the end of the day, not much is happening. And then people are becoming skeptical. Including politicians, and not only populist ones. They say this is just a game of the elite being pushed on ordinary people.

I agree. Hence, I have a different solution to this problem because greenwashing will not go away. It is behaviourally normal to try to cut corners.

There are two concurrent problems. One of them is greenwashing. The other is that if you enforce carbon pricing and carbon trading too aggressively, companies will just move away. This is not necessarily greenwashing, but it will make politicians not to be too aggressive in pushing companies. The consumer is the root cause of all this! If the consumer decides to use expensive cars that are a big source of carbon emission, if they choose to live in places with huge electricity, water, or gas consumption, or if they choose to eat products that are very high carbon emitters, companies will make that because the serve their consumers. That is normal.

So, what is the solution?

My view is that we need a carbon pricing or carbon subsidy model for the consumer like you and me. If we consume less carbon through our diet, through our travel, and through our utilities, we will be given subsidies in taxes. We will be given green financing through our banks and mortgages. Then companies will make products or innovate products so that they are low in carbon.

One way to solve the greenwashing or manipulation of the carbon pricing market is through educating and by making the consumer change their behaviour. Because consumers are atomistic. Consumers can’t just say that if Singapore changes its policy, they will leave Singapore. They are not going to do that. They are still going to be in Singapore, but they will change their behaviour, and that in turn will change companies.

Therefore, you would apply some form of bonus, penalty, or behavioral incentivization like what we, for example, know from car insurance to consumers' behaviour towards sustainability.

Exactly, just like a credit score. We should have a green score for the consumer.

So basically, you would like to move the overall debate about green and the ESG from corporations to consumers.

Yes. You can start from the top, or you can start from the bottom. And I think that if we start from the bottom, we are more likely to solve this problem than if we continue trying on the top because the big guys always find ways around it.

I think that this is a very good idea. Now when I go to some Skyscanner or Ctrip and book my flight, there will always be information about carbon footprint. And they will tell me to maybe give them a few dollars to offset it.

But even though it is nice to appeal to people's values, the consumers will see it very differently if they are truly incentivized...for example, if they are incentivized to buy a less carbon-intensive flight in a form of subsidy, et cetera. Or through taxation or even loans. But not only taxation–you will get subsidy in taxation, but you also get subsidy in loans. So, you will benefit on many fronts. We will move the green financing debate from giving green finance to corporations to giving green finance to consumers. Would you create a similar incentivization scheme? Not only carbon permits being exchanged between Tesla and GM but also incentives for SMEs and end consumers.

Yes. The SMEs are next because right now, they are left out. They have always been considered the stepchild in banking.

And as we don't know what to do with SMEs, there is less information. What are they doing? We should build a scorecard of the green footprint of SMEs. How much plastic do they use? What is recyclability? What technology do they use? If SMEs start disclosing that, it will get them better credit through banks because green financing will apply to them. And like this, they will also innovate. And they will realize which things are bad for them and will walk away from them. And again, corporations will respond to SMEs because they realize SMEs don't want the product or technology, they sell them. And that's the way to go, I think. Going ground up, starting from the consumers, then going to the SMEs and nibbling at the top, is the only way to solve this. We know there is greenwashing and relocation going on. Companies’ threats of relocation will always make politicians and bureaucrats back away.

Let's conclude this debate about sustainability by playing a devil’s advocate. Professor Damodaran from the New York University is maybe the best-known academician mocking ESG and sustainability. He says that this is again just a greenwashing game. Current members of the boards of companies don't have any motivation to think about what will happen in 2040, or 2050 because they won't be there. So how you would address this feeling of many? Do you really think that ESG can change the world for the better?

I think that as long as corporate boards and corporate CEOs continue to say that the objective of a corporation is to increase shareholder value, we will never take ESG seriously. When corporate boards and corporate CEO start saying that they must maximize not the shareholder value but the stakeholders’ welfare, that's when corporations will look beyond just maximizing profits. And they will realize that they need to also care about improving the environmental quality and the social quality. It's not just about the environment. When I think of ESG, not E but S is the bigger component.

So, this social part of ESG must be important because once we change that, we will be able to fix the environmental part. The environmental part is easier to fix because we already know the numbers and we know the objective we need to reach here: we need to have carbon zero; we need to be carbon neutral. But the social part is so nebulous. We know that women typically think about the environment much more carefully, but they are not on the boards.

Let's go back to the beginning of our debate. We spoke about the macroeconomy, about where to invest. We said let’s go to emerging markets, to tech, to sustainability because these are the drivers. Everything that is happening now will change the world of the future. And it may be that this world is going to be more regional, more fragmented. So, where do you see the global economy in 20 years? Will its point of gravity be in China, India, or maybe in Singapore? Or will it still be somewhere in the middle of either Atlantic if we are talking about Europe and the US, or somewhere in the Pacific if we are talking about China and the US?

I think that the center of gravity will be in Asia with four or five Asian countries becoming very important, starting with China, India, and Indonesia. Besides them, I would think of Vietnam, Malaysia. All of them have a lot of “it” factors. One of them is population. Population in these countries is relatively young. They have skipped a lot of technologies. If you think about banking technology, a lot of these people skipped it and jumped directly into fintech, such as e-wallets. As to telecommunication technology, they have skipped the initial stages and they are much savvier in using smartphones than American consumers. These are younger people who are hungry and who want to do something. For them, the labour-leisure trade-off is not important.

What do you mean by that?

They are willing to work 80 hours a week because they want to achieve something. The populations in Europe and in America are aging. They are also richer, so they have an entitlement mentality. They want to go to the beach once a year and go skiing once a year and then they want one whole month in August just for holidays. All of this would be shocking for Asians, and this is one reason why Asian economies will be roaring in the next 20 years.

I am afraid that in Europe, the conflict will continue. The conflict between eastern and western Europe is not a one-time thing. It is much deeper. There is a conflict about how the USSR broke up, what the satellite countries are, how the EU15 sees CEE countries and so on. I think that these conflicts are here to stay for the next 20 years. And that they will keep hurting the European Union and European growth.

How about the United States?

I think that the US will do well because it's a big country and it is still the world’s innovation hub. It may not be the center of the world anymore, but it will continue to innovate because of its big asset: the universities. The ability of these universities to innovate will continue. There are 3,000 universities in the US, far more than anywhere else in the world. This will give them an edge. But at the same time, I think that their two-party political system is hurting them. I also think that the excessive regulation and excessive reliance on traditional models of economic growth will be hampering the US in comparison to China, India, and Asian countries.

I've left out South America because it's still difficult to know what the engine for growth for Argentina and Brazil is. They have not yet shown how they could grow, either through technology, or some other factor.

Thank you very much for a great conversation.

Thank you and let’s meet in Singapore again!

Prof. Sumit Agarwal

Sumit Agarwal is Low Tuck Kwong Distinguished Professor of Finance and in the same time Professor of Economics and Real Estate at the National University of Singapore. In the past, he has held positions as a Professor of Finance at the Business School, Georgetown University. Before that, he was a senior economist at the FED Chicago and prior to joining the FED, he was a senior vice president and managing director at Bank of America.

Sumit’s research interests include issues relating to financial institutions, household finance, behavioral finance, real estate markets and sustainability. He has published over one hundred research articles in journals like the American Economic Review, Quarterly Journal of Economics, Journal of Political Economy, Review of Economic Studies, Journal of Finance, Journal of Financial Economics, and Review of Financial Studies among others.

Jan Ruzicka

Jan is a Chief Reputation Officer at the Home Credit Group, the world’s leading consumer finance provider. Based out of Hong Kong, Jan runs company networks in the US, Asia and Europe. Before that, he used to live in Beijing, Cambridge and Prague. He spent ten years working for the Czech Government, advocating and shaping the health reform as the Director-General at the Ministry of Health.

Jan teaches Behavioural Economy and the Disruption of Finance and Healthcare at universities in Asia and Europe. He is especially interested in how innovation can create financial inclusion and health equality.

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