To varying degrees, the dictators are under pressure. 

Xi’s antennae twitching. But how far?

In the recent Jupiter Merlin webcast, we speculated about General Secretary Xi’s reaction to the significant and widely spreading civil unrest arising out of his repressive measures by which the rigid policy of zero tolerance to Covid was being prosecuted. Would he deploy the security services in a flurry of mass-arrests or worse (i.e. Tiananmen Square and Hong Kong all over again); or would he resort to stirring up nationalistic fervour with diversionary sabre-rattling tactics over the future of Taiwan and anti-western rhetoric; or would he relax and acquiesce? The answer was fast arriving: for the second time since the pandemic broke out nearly three years ago (the first occasion was in the spring of 2020 when amid rising public tensions about compulsory quarantine policy, he went walkabout among the tenements to show he was at one with the people), and with his political antennae twitching again as the alarm bells rang louder, he opted for the latter route, a gradual relaxation of Covid constraints.

 

His problems are not over yet. When you are an absolute ruler and things go wrong, the buck stops firmly at the top.

 

“The people are the creators of history as well as the fundamental forces that determine the future and destiny of the Party and the country. We must adhere to the principal position of the people, adhere to building a Party that serves the interests of the public and to governing the country for the people.”

 

So declares one of Xi Jinping’s 14 personal Principles, the People-centric Approach contained in his ‘Thoughts on Socialism with Chinese Characteristics for a New Era’, enshrined in the Chinese Communist Party Handbook in 2016 when the General Secretary was anointed “Core” (closest thing possible to an Emperor) and subsequently in 2021 “Helmsman” and “People’s Leader”. The latter was ahead of the Party giving its approval this October to scrap the two-term limit for a Chinese President, paving the way for the possibility of Xi ruling for life. Having already appointed himself in sole command of the military and the domestic security services with all the connotations of the potential consequences for dissenting, that approval was a given. It goes without saying he was duly re-elected.

 

We have reported this Principle verbatim for one simple reason: it is a tacit admission that in Chinese communist society the Party and the people are one; that however hard-line, the senior governing cadres ultimately derive their authority from the will of the people. However, as Xi has accrued and accumulated power vested in him personally to the extent now of his being at least an autocrat if not a dictator (there is still a formal Party machinery with governance protocols and processes, however vestigial), and in his determination to reassert socialist dogma, he seems to have forgotten that explicit contract of reciprocity and interdependence between the state, the Party and the people. Read the Principle again and think of it in the context of nearly a fifth of the youth population being unemployed in a command economy and offered little hope of real prosperity; of the Uyghur Muslims incarcerated in ‘re-education’ detention/concentration camps; of the suppression of those freedoms in Hong Kong granted and guaranteed by international treaty; being denied the right to free speech and access to the global internet; and for the last nearly three years, a distinctly heavy-handed approach to dealing with Covid, including enforced, compulsory isolation in state-owned quarantine blocks.

 

But there are deeper, long-term challenges confronting Xi which will ultimately determine his longevity as leader and define his legacy as Core and Helmsman. It is about how to achieve China’s strategic aims within a socialist framework in which the duration of the Chinese Communist Party is supreme, while retaining control over the population but not so tightly they rebel against you. Consider: Xi’s ambition for a New World Order with China at the pinnacle; promoting domestic consumption in a rebalanced economy without allowing implicit consumerism (i.e. creeping capitalism); how to satisfy the needs of an increasingly well-educated population whose current employment opportunities are far from guaranteed and even if met are relatively menial compared with expectations; how to maintain long-term growth and economic prosperity for a population approaching 1.4bn souls but where the evidence of Japanese-style demographics (an aging and less productive workforce in this case shaped by China’s strict historic birth control policies). Are these compatible, reconcilable and achievable?

 

Xi might have stuck a Band Aid on the Covid crisis through allowing people to isolate at home (and that Band Aid analogy is not so far from the truth: China’s vaccination policy has been woeful in comparison with the West, and the WHO anticipates a significant spike in cases and deaths in the next few weeks) before further relaxations anticipated next year. But arguably Covid has merely been the lightning conductor for a range of greater grievances which will need careful management. 

Iran’s antennae on the other hand remain blunt and insensitive 

If China is an autocracy, Iran is a dictatorial theocracy. Three months of widespread rioting has arisen from the death in custody of a woman accused of flouting the female dress laws. The protesters failed to be quelled by hard-line repression. As a sop, the Mullahs have given way and abolished the detested Morality Police, those tasked with enforcing strict Islamic law, yet they have begun a public programme to execute those ringleaders they believe to be enemies of the state.

 

Iran remains a pariah. It is already sanctioned thanks to breaking the nuclear containment treaty and it is still running rings around Joe Biden about America’s readmission to that forum. Now, Iran has actively sided with Russia in Ukraine by supplying drones and drone technology to Putin in return for which Moscow is actively training Iranian air force pilots in anticipation of supplying Tehran with the latest generation Russian fighter jets. Israel and Saudi Arabia, both of whom have a track record of being touchy on the trigger when under, or even perceived to be under direct threat, will be considering the ramification to regional stability across the Middle East and in to the Arabian Peninsula where Saudi and Iran are already on opposite sides of a long-running proxy war between Houthi rebels and the government in the Yemen.

 

China has its own agenda which it will prosecute to the extent it is able with or without external cooperation, but it is still entirely open to dialogue with the West in forums such as the G20 and the UN. Iran has no such intent; on the contrary within its own considerable sphere of influence it is actively out to create mischief. But currently, the principal threat to the regime is from within Iran, not externally.  

Putin undeterred 

Finally, Russia. Different again in nature from both China and Iran: an autocracy whose oxygen is money, patronage and the hierarchy and self-interest of the kleptocracy.

 

In a relatively limited way (and even if not as strongly as before, most Russians still support his war aims), Putin has faced public insurrection which so far has been quickly and firmly slapped down. Indeed, among much speculation as to how isolated his political situation is at home as portrayed in the western media, informed sources indicate that the greatest threat to his enduring command is from the hard-liners in the Kremlin who say his war-mongering lacks aggression and ambition.

 

In previous editions we have said that the war will continue so long as both sides have the means to wage it: Putin depends on domestic political conviction that his course is right, but he also needs more (and better quality) fighting personnel, effective leaders and munitions and through exports notably of oil and gas, the means to pay for it all. Zelensky simply needs more and better weapons.

 

Zelensky’s aims are as simple as they are unwavering and unequivocal: the expulsion of all Russian occupying forces from all Ukrainian territory, including the Crimea. The West on the other hand is showing signs of war weariness, wavering and becoming increasingly equivocal. Whatever the public display of unity against Putin, as winter starts to bite, European capitals seem to be growing bored with Zelensky’s constant begging for more help; so the calls to negotiate with Putin are gradually growing. The new Italian government campaigned on such a premise. And now, Germany’s Olaf Scholtz and the EU Commission’s Ursula von der Leyen are joining Emmanuel Macron in trying to persuade Putin of the need for a withdrawal for a negotiated settlement including security guarantees to Russia, and which presumably would include Ukraine having to make territorial concessions (effectively a derivative of the previously failed Minsk agreements which had all the hallmarks of appeasement written into them). Even Joe Biden has opened up the possibility of dialogue, though apparently quickly ‘corrected’ by the White House.

 

President Zelensky might be forgiven for thinking he is being played as NATO’s useful idiot: let us not forget that the US and the UK were the explicit guarantors of Ukrainian sovereignty dating all the way back to the 1994 Budapest Memorandum (when Ukraine handed over its entire nuclear arsenal); given his country has been attacked twice since by Russia, those guarantees were not worth the paper they were written on. Zelensky’s troops are expending bullets and blood not only on Ukraine’s behalf but NATO’s too, and yet last week, having already allowed Sweden and Finland to join the alliance this year (and Finland has an 830-mile border with Russia), NATO members once more refused to endorse Ukraine as a future NATO member. Apparently it might rile Putin. 

Investors: it’s all about risk 

So why does all this matter? Geopolitics and the pandemic have directly and significantly shaped our investment universe for nearly three years in the most dramatic fashion since the global financial crisis a decade-and-a-half ago. The pandemic was a “Black Swan” event, out of the blue; Putin’s war on the other hand was a “Black Elephant”, completely forecastable but almost totally ignored in disbelief. Both self-evidently caught investors by surprise. The effects have been palpable in all asset classes and currencies. Today, as the western democracies attempt to deal with the twin problems of inflation and recessionary pressures, taking bond yields as a barometer, investors are significantly more concerned about the immediate economic pressure than they are about longer-term macro uncertainties (yield curves are, in the lingo, ‘inverted’: i.e. short-term yields are higher than those with longer maturity dates; as an example the 3-month US Treasury has a yield of 4.3% whereas the yield on the 30-Year Treasury is only 3.5%; the orthodoxy would be the opposite).

 

It was the economist J K Galbraith who famously observed of the shortcomings of his own profession: “forecasters divide in to two types: those who don’t know and those who don’t know they don’t know”. While a steepening curve is usual in bond markets (i.e., looking at it on a graph, the line, or ‘curve’, slopes upwards from bottom left to top right), convention also says that greater steepness being added happens at the short-dated end of the curve rather than further out which tends to remain relatively stable predicated on the long-term outlook for interest rates. But arguably, given the uncertainty of the future, the longer end of the curve should sometimes pivot upwards to account for the innately greater risk. Take Germany as an example: investors regard German government debt as one of the safest of safe havens, currently requiring only a 1.7% annual rate of return on a 30-year loan to Berlin (the equivalent in both the US and the UK is currently 3.5%). Nobody has a clue what the economic or political condition of Germany will be three decades hence but markets are rating the chances of anything out of the ordinary being almost vanishingly small. And yet quite unexpectedly, only last week, Germany nearly suffered a far-right-wing political coup aimed at bringing down the Bundestag. That it was fortunately foiled and it failed is beside the point.

 

Markets see themselves as rational. That does not mean they are always right. Volatility arises out of a crisis or conditions which provoke a significant difference of opinion. There has been lots of that recently. The orthodoxy (in this case the ‘term premium’ or the perceived level of risk the further into the future we go) should always be open to being challenged. It pays to keep us all on our toes!

 

The Jupiter Merlin Portfolios are long-term investments; they are certainly not immune from market volatility, but they are expected to be less volatile over time, commensurate with the risk tolerance of each. With liquidity uppermost in our mind, we seek to invest in funds run by experienced managers with a blend of styles but who share our core philosophy of trying to capture good performance in buoyant markets while minimising as far as possible the risk of losses in more challenging conditions.  

The value of active minds – independent thinking

A key feature of Jupiter’s investment approach is that we eschew the adoption of a house view, instead preferring to allow our specialist fund managers to formulate their own opinions on their asset class. As a result, it should be noted that any views expressed – including on matters relating to environmental, social and governance considerations – are those of the author(s), and may differ from views held by other Jupiter investment professionals.

Fund specific risks

The NURS Key Investor Information Document, Supplementary Information Document and Scheme Particulars are available from Jupiter on request. The Jupiter Merlin Conservative Portfolio can invest more than 35% of its value in securities issued or guaranteed by an EEA state. The Jupiter Merlin Income, Jupiter Merlin Balanced and Jupiter Merlin Conservative Portfolios’ expenses are charged to capital, which can reduce the potential for capital growth.

Important information

his document is for informational purposes only and is not investment advice. We recommend you discuss any investment decisions with a financial adviser, particularly if you are unsure whether an investment is suitable. Jupiter is unable to provide investment advice. Past performance is no guide to the future. Market and exchange rate movements can cause the value of an investment to fall as well as rise, and you may get back less than originally invested. The views expressed are those of the authors at the time of writing are not necessarily those of Jupiter as a whole and may be subject to change. This is particularly true during periods of rapidly changing market circumstances. For definitions please see the glossary at jupiteram.com. Every effort is made to ensure the accuracy of any information provided but no assurances or warranties are given. Company examples are for illustrative purposes only and not a recommendation to buy or sell. Jupiter Unit Trust Managers Limited (JUTM) and Jupiter Asset Management Limited (JAM), registered address: The Zig Zag Building, 70 Victoria Street, London, SW1E 6SQ are authorised and regulated by the Financial Conduct Authority. No part of this document may be reproduced in any manner without the prior permission of JUTM or JAM. 29712