Perspectives: Total control can be risky

Anthony Rayner

Premier Miton Macro Thematic Multi Asset Team

Background actors

The main focus for markets remains firmly on central banks and specifically, the degree to which a Fed pivot is underway, and therefore what type of recession is most likely. In the background though, there are some important developments that have gone largely unnoticed, or at least not prioritised by markets.

We wrote recently about how the elevated cost of living is challenging the social and political environment in Western democracies, highlighted by the broadening out of strikes in the UK. This continues apace and, of course, is evident in other democracies too.

Social unrest in Iran

However, there are also some cracks appearing in non-democratic countries. Iran has had its worst social unrest in years, after a woman who had been accused of not observing the country’s Islamic dress codes died in police custody. Additionally, and perhaps of higher profile globally, the Iranian national team protested by refusing to sing the national anthem at their first World Cup game.

The anti-regime protests have been pushing for a secular regime to replace the theocratic one. It’s difficult to tell but whilst it appears to be about religion in the first instance, it is also very much about excessive government control. Indeed, the authorities have appeared to have loosened dress code restrictions, for example the wearing of a hijab, and there are rumours that they have disbanded the morality police, who were responsible for enforcing dress codes.

China’s covid conundrum

Similarly, a very rare and open expression of discontent has also been seen in China of late. President Xi has been very effective in purging potential political opponents, and he recently secured an unprecedented third term as head of the Chinese Communist Party, but unrest has come from outside the Party.

The context in China is a lockdown-weary society and a record number of Covid cases, but the catalyst was a fire in a residential building that was deemed to have been more severe due to lockdown restrictions. Again, the World Cup played a role, images in China of football crowds in Qatar not wearing masks reinforced domestic perceptions that China has been slow to exit lockdowns. Over recent weeks there have been numerous, often contradictory, news stories about Covid restrictions being eased. It’s difficult to read between the lines, suffice to say it most likely reflects internal tensions about what to do next with the President’s signature zero-Covid policy.

Let’s not pretend that the higher cost of living which is driving unrest in democracies has no part to play in undemocratic countries. In societies where many social freedoms are limited, economic prosperity arguably becomes an even more important factor. The cost of living will have chipped away at economic prosperity, and in many cases led to economic misery. This should be seen too in the wider context of deglobalisation, with sanctions and tariffs increasingly common and compounding economic hardships in many cases.

Finding common ground

Interestingly, in an ever-fragmenting world, these two countries are strengthening their ties with each other. In Iran and China, the protests and contexts are of course very different in many ways but the overriding sense that links the two is that populations are tired of the authorities exerting too much control. In the end, unrest occurred because of, and despite, the high levels of control that exist within these societies.

Going forward, options range from cracking down, offering concessions or in the extreme, regime change. It does appear some concessions have been granted already, as outlined above. However, significant concessions are difficult to package alongside a “strongman” image. History suggests that more often than not these types of protests tend to fizzle out. Time will tell but a good dose of cynicism is probably healthy.

Take Russia, how many times since Russia invaded Ukraine at the beginning of this year have we been told “on good authority” that Putin has only days left in power? This is all very well but what’s it got to do with markets?

Politics pervading market power

Iran is a major oil producer and a serious military power in an often-volatile region, so any instability, which is the most likely non-status quo scenario, would feed into geopolitical risk. China on the other hand, is less likely to suffer material instability, instead the most likely non-status quo scenario is the easing of China’s zero-Covid policy. This would help the domestic economy, which is struggling, and the global economy, soothing global supply lines and boosting global demand growth. In the end, this neatly feeds into what the markets are focusing on at the moment, namely inflation and recession risk.

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