Implications of COVID-19 on the Global Economy
Mr. Ohad Topor is CEO as well as chief investment officer of TCK Investments. During the last 20 years, Mr. Topor has invested across most major asset classes globally. He is an advisor to the Korea Israel Innovation Center. He holds a Masters in Business (MBA) from Stanford University and a B.A in Economics from Tel Aviv University.
Korea has been applauded for how it handled the COVID-19 crisis and appears to have flattened the curve. Mask distribution has also reached a manageable level and there is no panic buying of supplies like in the U.S. or UK. Can we view these features as signs of a stable economy in Korea or do you believe there are still dangers for the Korean economy?
Korea contained the epidemic in a very impressive way, and it is serving as an example for the whole world on how to manage such a crisis. But in terms of the economy, I think that Korea is facing higher risks than a typical country, because of the export nature of its economy. 44% of Korea’s GDP is exports.
This pandemic is not just a healthcare crisis, but also a globalization crisis. I fear that, after the urgency of this healthcare crisis fades, governments will start to impose protectionist measures, especially in key industries. I see a rethinking of trade policies and free trade agreements, at least in certain key strategic sectors, but possibly also in broader areas. I really hope that this doesn't happen, because I think that globalization has been a huge benefit for the world. It has helped increase the understanding between cultures and countries, and it has actually reduced the risk of war by having countries relying on each other for key economic processes like supply chains and other key bilateral investments. Globalization contributed immensely to the peaceful era that we have been enjoying for many decades.
As an exporting nation, Korea could face a second-stage economic impact once consumers and businesses in Western countries adjust their purchasing habits, which could reduce the demand for products coming from Korea and other exporters. I think there is still uncertainty about the Korean economy and some risk to the downside, but again I'm more worried about anti-globalization tendencies which I think are counter to where the world should be going, especially after this healthcare crisis, that showed that global collaboration was necessary and wasn't done in a good enough fashion.
Korea has risen up to become a developed country that has experienced rapid growth since the 1950s. Some would praise Korea’s so-called ‘Miracle of Han River’, but others worry that Korea’s economy is vulnerable to global trends as it is over-dependent on overseas exports and international markets. What are the strengths and weaknesses of Korea’s current economic situation?
As I mentioned in the answer before, Korea is heavily skewed towards exports, but that is not a bad thing. It's actually a very natural thing to bring a country up the ladder of GDP per capita via manufacturing and exports, until you get to a rich enough level where there is stronger domestic demand and the population consumes more goods and especially services produced domestically. The fact that Korea has relied on exports until now is not a bad thing, and actually there is still room to grow in exports.
Korea is now in the club of countries with over $30,000 income per capita. I think that until Korea gets to $35,000, traditional exports should be a main driver of GDP, but not the only driver. Korea should think more about higher value-added areas of entrepreneurship, high-tech , entertainment and other areas Korea has shown an advantage. You mention over reliance on foreign investors, and this is a common thing in news paper in Korea. I think the economy is naturally exposed to global trends, but not over-dependent. I think that it is right for Korea to rely on international markets and investors, because if Korea was not open to international markets, for example limiting how foreigners invest, the cost of capital for Korean companies would be much higher, and this is a critical component in your competitiveness. I know that many people look at the openness of Korea’s financial markets and say it's an ATM of global institutional investors: these investors come in when it's a good time and they take the money out quickly when it's a bad time. I don't see this as a negative thing, I see it as very important that foreign investors can invest in Korea, because that allows Korean companies to grow and compete with a low cost of capital that Korea’s competitors have. If Korea did not have this openness and did not allow foreign investors to buy Korean stocks and participate in the growth of Korea, then your competitors (namely countries like China and Japan) would win the long-term economic race. Especially in China, there is a lot of government support to companies and in Japan companies benefit from a very low cost of capital due to the Bank of Japan’s extremely accommodative monetary policy. Even if it seems a little uncomfortable that foreigners can come in and out, which is natural because Korea is not a very big market (less than 2% percent of global corporate market capitalization), openness is a necessary component for its success. I don't think Korea would have been as successful as it is, if it did not have open financial markets and solely continued to rely on government capital support.
COVID-19 has now become a global pandemic and many countries are releasing emergency loans to prevent economic crises. How effective will they be, and what other measures could be considered for economic protection?
A lot of countries have quickly approved record amounts of economic relief measures and other stimulative policies. For example, the CARES Act in the United States amounts to a stimulus of $2.3 trillion, approximately 11% of its GDP, or 66% of the total US tax revenues for 2019. The 2008 crisis taught many policymakers that government intervention at the right time and of the right strength was very helpful in stabilizing the economy. It's important that it is very sizable and very fast in order for it to achieve its stabilization goal. There is a big debate now about whether it’s healthy for the economy that the government steps in such an aggressive way, because it's basically increasing liquidity and stability in an artificial way, not through real demand. But history does show that, during recessions, increasing government spending and the monetary base has been a very good balancing act, that enabled companies to lower the volatility of their hiring, spending and investment decisions. The measures taken by governments, especially in major developed markets like the US, are the largest ever seen. As containment measures halt consumption in so many countries, the governments are giving companies grants and loans to cover the cost of keeping people employed, or even hiring people directly via government-led activities. So it's a very big stimulus, and I think it has the potential of being a successful balancing act over the long-term. The low interest rates and the extreme stimulus we're seeing around the world will eventually have a cost, the scope of which is unclear right now.
China became the second largest economy of the world, surpassing Japan, following the Global Market Crisis in 2008. Do you think that there will be a dynamic shift in the international order in terms of economic power in the near future?
China is clearly a global leader and a dominant player economically. China has a well-coordinated economic system with a clear direction from the very top, and a very entrepreneurial population that is eager to do better than their previous generations. China enjoyed tremendous economic success, and its population climbed the income ladder faster than any other major country in history. China’s economic rise is filled with good examples of business leaders who were able to achieve huge success, and these examples are a strong driver of Chinese entrepreneurship. This is playing a big role in China’s rapid rise in the technology sphere, and in transitioning from a low-value added manufacturing hub to a high-value added diversified economy. Another key benefit is that China is a very big country, with a population larger than the USA and Europe put together. As income growth continues, it reaches more corners of China, including many areas with bigger potential that started from a very low base.
On the other hand, we have to look at the risks, because China has reached this stage very rapidly, and the speed of its uninterrupted economic growth typically comes at the cost of growing imbalances under the surface. In an open free-market economic system, the economy is typically allowed to burst and correct itself along the way, but in China the government is the only authority with the power to step in and correct those imbalances. This means that the government is required to constantly make the right decisions in terms of managing asset bubbles, at such scale that it's hard to feel entirely comfortable that they will be able to always manage all the imbalances that will keep surfacing in their economy.
The second risk is China’s aging population. I am from an economic school of thought that believes that demographics are one of the most important metrics to project the growth of a nation’s economy. It's difficult to maintain the same growth rate while the population is on a declining trend, which is a strong headwind for China. The period of rapid easy growth, fueled by manufacturing, export and population growth, is already in the past.
The third risk is the wealth inequality between people and regions within China. It's hard to talk about China as one country, because there are pockets of extreme wealth that are comparable to those found in the top wealthy nations, and there are some other areas that are extremely underdeveloped. Not only China cannot continue to grow indefinitely at this fast pace, but it's also difficult to balance out the wealth across the regions in a way that doesn't discourage private entrepreneurship. The US has built a country based on private entrepreneurship over many generations, while China is doing it very quickly over 1-2 generations. There are many unknowns when you are working at a transformation of this scale.
The G2 rivalry between the U.S. and China is a heated topic among politicians and economists. Some even view this rivalry as the ‘Neo-Cold War Era’. How to you view the G2 rivalry, and how will it affect the global economy?
The current political environment in many Western countries (including the US) is trending towards greater support for protectionist policies and more populist ideas. We are all familiar with the political slogans suggesting “each country for its own”. However, I think that cooperation is needed between countries like the US in China, as it fueled the growth of both countries over the last 30 years. The US is consuming China's goods and China is financing the US by buying its Treasury bonds, which was one of the most profitable forms of cooperation in history.
If we continue to see a continuation of protectionist sentiment, we will see diminished collaboration between countries. But I also think there is a possibility of a reversal of some of these protectionist measures over time. I believe that, over the long term, the world is moving more towards globalization with episodes of short-term retreats towards de-globalization. For example, in his best-selling book Homo Sapiens, Israeli professor Yuval Noah Harari wrote that it’s very clear that humanity has been moving towards globalization for centuries and the intertwining of interests between countries. Even if there are short periods of retreat from that trend.
In the short-term, the rivalry between the USA and China has negative implications, but I don't think it will result in a war. I think that the economic cooperation between those countries will take a hit, and many other countries will re-orient themselves towards inward-looking trade policies for the next short-chapter, trying to gain an edge internally and making sure that strategic industries are supported. But over the longer term I see international cooperation coming back, because there is a clear competitive advantage coming from cooperation between countries, and there will always be a mutual economic incentive to do so. The winners of today's economy are winners because they found ways to collaborate properly, and I think the US in China will find a mutually-beneficial way to work together in the future again.
As a final question, what are your overall expectations for the global economy and for the Korean economy this year and beyond?
The issue with economic forecasting this year is that this has been a very rapid recession, paired with an equally rapid crash in asset prices, as governments around the world basically closed down their economies. We're seeing unprecedented forecasts of lower GDP numbers, and now seems very clear that the drop in GDP is far bigger than that seen in the 2008 crisis. But this does not mean that we can project that markets must decline further from here, because the government stimulus is a very big counter-factor. This is positive for investors, at the time of this interview, there are many signs that investors are gaining comfort with the progress. I am personally a bit more skeptical.
In terms of the global economy, there are pockets of risk in illiquid markets. A lot of investors have put vast amounts of money in illiquid asset classes, while accepting fairly low returns. These are assets like real estate, private equity, leveraged buyouts and other types of illiquid products in which investors are required to lock up their money for years. These type of investments have ballooned globally (as well as in Korea) in the last 10 years.
I think there is a big risk of a domino effect in private illiquid markets, once we start to see losses. For example, we saw that Softbank is now expecting record losses of $24 billion from its Vision fund and its VC investments in private companies WeWork and OneWeb. Those losses for a big player like Softbank can have a domino effect in forcing downward revisions of valuations of private technology companies and Venture Capital investments. Illiquidity is a global issue, that I think could have a negative effect on the entire global economy.
The second thing to watch is of course the situation in China, where the economy is seen slowing to the weakest growth pace since at least 1980. Many issues tend to surface during periods of economic slowdowns, so we need to see how this plays out in China. Otherwise, with this huge global stimulus in place, and the fact that yields on low-risk assets are so low, money is forced into higher-risk assets, like equities, whose prices could increase as a result.
As far as Korea is concerned, as I said, exporting nations are at higher risk than the average nation, and Korea is among them. The reduction of import in big Western markets will affect exporting nations like Korea more than others. On a positive note, I think that Korea is extremely talented in reinventing itself and re-orienting its path to achieve its long-term goals. The population is very diligent in its work, and my experience of managing a company in Korea and investing has been extremely positive. Our clients are very smart business leaders and can navigate the waters if needed. I think that Korea has a huge amount of talent, a very unique quality that I haven’t seen in many countries where I have been active. Right now, businesses need to make the right decisions in terms of how they invest, and the government needs to enable businesses and their owners to take the economy forward, while giving them enough support to comfortably take the necessary risks. I am seeing some business owners in Korea, either working with TCK or with others, making some very smart long-term investment decisions, either for themselves as individuals or for their companies, and I think that's very encouraging to see. Thank you.