Reflections on Davos

Geopolitics

By Kenneth Weinstein and Mike Rogers

Geopolitical uncertainty overshadowed any sense of optimism

With no prospect of the current geopolitical context improving, businesses must have a deep understanding of their operating environment and identify the key issues or trends that most impact their business activities, outcomes or strategy.

The world is currently in a window of “tit-for-tat” activity across multiple areas of conflict. Concurrent challenges in Europe, the Middle East and Northeast Asia magnify the burden on the US, even if US allies and partners are increasingly determined to increase their defense spending. Efforts to deter Iran and its proxies have become more challenging as Iran inches closer to becoming a nuclear-armed power. 

These crises are interconnected, as Russia, Iran, China and North Korea, among other nations, seek to exploit opportunities to challenge the rules-based international order with significant implications for global economic and energy security.

Businesses are deeply affected by the geopolitical fallout

The most urgent example is the disruption of shipping in the Red Sea, which is compelling companies to de-risk their supply chains.

The movement to home-shore manufacturing, especially in the chip sector, and to implement rigorous export controls in areas of emerging technologies such as AI, will continue. However, the shortage of skilled workers in the US, especially for the chip sector, remains a major obstacle.

The green transition is challenged by China’s growing dominance of the EV export market and its current dominance of the EV battery supply chain. 

2024 elections

The first major global election of 2024, William Lai’s election as president of Taiwan – which China opposed – will lead to an escalation of rhetoric and tensions in the Taiwan Strait. An outright invasion of Taiwan by the PRC is unlikely in the near term, but other potential scenarios include stricter controls of trade into Taiwan or even an attempt to seek to control one of Taiwan’s outlying and less well-defended islands. 

Technology, Media, and Telecommunications 

By Ash Spiegelberg, Alice Gibb and Cerith Evans

AI is everywhere

From Kristalina Georgieva at the International Monetary Fund to the professional-services firms looking at the impact on the workforce and supply chains, everyone was talking about AI. Conversations focused on how companies are using AI in the day-to-day, in supply chains, to free up worker capacity and to augment their own services. There was a focus on the enterprise-level agenda with large tech companies branding everything in their Promenade shop fronts as AI, as well as integrating the topic into their messaging on and off stage. On stage, panel members even made jokes about how long it would take to mention AI in non-AI settings. The takeaway for business leaders was the importance of having an informed view of the impact of AI on their business, with clear messaging about the advantages and disadvantages for all stakeholders.

Talk of crypto

Following a surge in crypto prices and the recent bitcoin ETF approval news in the US, crypto was garnering a lot of interest and discussion. While the industry presence was dialed down in comparison to previous years, there were a number of crypto-sponsored shop fronts on the Promenade. We also observed more meaningful interaction between the traditional finance audience and the crypto group. Perhaps an emblem of this was that the packed annual party hosted by Anthony Scaramucci, the former Trump communications director turned crypto evangelist, ran out of wine.

TMT capital markets

The outlook for the dealmaking environment remains patchy, with investment bankers hoping that capital markets would soon reopen, and equity issuance would drive some revenue gains. With a few high-profile IPOs in the pipeline and some M&A action already this year, there is a renewed sense of hope. There was also talk of strategic bolt-on deals in the AI space and with private-round companies in need of an exit. Private equity executives are said to be fed up with sitting on the sidelines, and some may try to sell assets this year after largely holding off over the past 18 months. 

Financial Institutions

By Charles Pretzlik

Interest rate cuts (and lack thereof)  

European fiscal leaders had varying predictions, with coverage noting that the differing opinions among central bank heads meant it remained difficult to predict what direction the European Central Bank (ECB) would take. Initial comments from Christine Lagarde, President of the ECB, led to a worldwide selloff when she signaled that borrowing costs would come down in the summer rather than spring.

ECB Governing Council member Robert Holzmann also dismissed the possibility of an early rate cut, indicating that recent trends point in the opposite direction, and stating that rate cuts in 2024 are unlikely due to persistent inflation and the potential risks of a recession.

Following these comments, leaders of many of the major banks and other financials were asked to give their own predictions and thoughts during sideline interviews at Davos:

• Steve Schwarzman of Blackstone said he sees a return of "animal spirits" in the finance sector.

• Morgan Stanley's Ted Pick anticipates lower interest rates unlocking deals.

• Bank of America CEO Brian Moynihan remained positive in his prediction, expecting eight rate cuts in the next two years but noted, “the [US Federal Reserve] has got to get normalized and get out of the way.”

• A Bloomberg article quotes a number of other global banking executives taking a bearish position on rate cuts, including StanChart’s Bill Winters, JPM’s Daniel Pinto and Nomura’s Christopher Willcox, and reporting Sergio Ermotti from UBS’s comment that the “outlook for four or six rate cuts for 2024 look[s] a little bit optimistic.”

Banking competition concerns

During a private meeting led by Barclays CEO C.S. Venkatakrishnan and Manulife CEO Roy Gori, a media source reported that major bank CEOs expressed concerns about competition from fintech firms and private lenders and grievances about burdensome regulations.

Attendees at the session discussed navigating risks amid geopolitical tension, macroeconomic uncertainty and technological disruption, with a particular focus on regulatory challenges in the UK and Europe.  

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