Key Themes for the Year to Come: What to Look Out For in 2016

At the beginning of every year the Sign of the Times presents a list of key themes occurring during the next 12 months that we believe had potential to be catalysts or triggers for changes to shape our markets, world, and lives. Last year we had tried to paint up- and downside scenarios of how these themes would play out: in some cases the downside scenarios have become all too real, e.g. our concern that individual agendas would hamper the international fight against IS, while in other cases our upside projections have been exceeded e.g. with India’s GDP looking to finish the year in excess of 7%. This year, we again would like to look ahead to focus on what 2016 may bring, focusing on the big competing ideas across a number of areas that will shape the years to come, laying out the some of the key dates and decision making points and their potential implications for the world.

  1. Asian Trade: China and the RCEP vs The US and TPP

    Background. The signing of the US-led Trans-Pacific Partnership in late 2015 is likely to accelerate the finalization of the proposed Regional Comprehensive Economic Partnership (RCEP) free trade agreement, which China has been pushing, with both partnerships having the potential to shape the rules of trade in the region in the coming decades.

    Key Dates. Conclusion of RCEP negotiations expected mid-2016.

    The Competing Big Ideas

    China and the RCEP. The RCEP includes a total of 16 countries that cover c.45% of the global population 30% of global GDP. Its implementation would create the free trade integration of Japan, China, and Korea as well as the majority of ASEAN countries, creating a massive and contiguous Asia free trade area with China at (or near) its center. The RCEP, to date, is primarily focused on free trade and tariffs.

    The US and the TPP. The TPP includes a total of 12 countries that cover c.40% of the global population 60% of global GDP. Although it also focuses on tariff reductions, it covers a broader set of objectives around the rule of trade, seeking to improve governance, investor protections, environmental protection and labour standards in the region.

    Potential Outcomes and Implications

    The RCIP and the TPP are another example of the power struggle that is emerging between the US and China. The outcome will determine which of the two shapes Asian trade. Given China’s lack of willingness to participate in institutions where it does not play a leading role, it is an unlikely participant in the US-led TPP. This sets up the RCIP and the TPP as opponents. Notably, India have not yet joined the TPP while continuing to engage in the negotiations over the RCIP. Should the TPP fail to become a partnership with comprehensive regional coverage it will be difficult for it to meet its goal of establishing the next level of commonly accepted trade standards, leaving the door open for other institutions such as the RCIP to shape the future of Asian trade. While the RCIP to date is focused on free trade rather than standards, its comprehensive nature and the leading position China has within it makes a key candidate for Beijing, rather than Washington to shape the terms of trade in Asia.

  2. Afghanistan: Withdrawal vs (Perpetual) Engagement

    Background. There are 6,800 US troops and 6,310 from other NATO countries currently deployed in Afghanistan. The security situation in the country has deteriorated significantly since 2013 with the withdrawal of the majority of NATO combat troops, putting pressure on member states to postpone the ultimate withdrawal of all combat forces.

    Key Dates. The withdrawal of US and other NATO troops to be concluded at the end of 2016.

    The Competing Big Ideas

    Withdrawal. Current plans, driven largely by NATO states domestic fiscal and security considerations and envisage a further reduction of troops at the beginning of the year with a full withdrawal by year end. Without a peace agreement with the Taliban in place, the withdrawal of NATO will likely weaken the Afghan government both on the battlefield and at the negotiation table. Given the steady surge in Taliban attacks since US’ initial withdrawal, it is questionable to what extent democratic Afghanistan can endure without foreign military support.

    Engagement. Western engagement in Afghanistan has to date focused primarily on military engagement and related areas such as troop training and support, the focus of the remaining foreign contingent on the ground today. The US and its allies have yet to formulate effective strategies for economic, political or other forms of engagement to underpin the security of the region, as demonstrated by the lesson of Iraq, where the complete removal of troops in 2011 helped create the conditions for the rise of IS. Engagement would signal that the US has learned that previous withdrawals lead to enmity towards the US, but would also potentially mire the US in longer term domestic politics and accusations of colonialism, which is has been keen to avoid as a superpower.

    Potential Outcomes and Implications

    A full withdrawal by NATO forces, which at this point appears to be highly likely, will clearly reduce stability in the region, which to date has not been sustainable without military intervention. However, the departure of the US and its allies gives China an opportunity to play a bigger role in Afghanistan, employing a potentially more sustainable mode of engagement. Afghanistan is a geographic lynchpin of China’s New Silk Road initiative, making its stability a necessity for China from an economic and security perspective. China is the largest investor in Afghanistan granting it strong influence on political and economic affairs, and it has recently hosted Afghanistan-Taliban talk in Beijing. Stabilising Afghanistan would be a major win for China both from an economic and foreign policy perspective, succeeding where both Russia and the West have failed repeatedly.

  3. Chinese Territorial Disputes: Continued Ambiguity vs. A Clear Line Drawn

    Background. In October 2015, a UN Permanent Court of Arbitration accepted the jurisdiction over a dispute brought by the Philippines against China regarding the maritime sovereignty in South China Sea, opening the door to further territorial disputes being brought to international courts, despite China’s formal rejection of the arbitration.

    Key Dates. Announcement of arbitration results are expected in late 2016 to early 2017, based on previous border dispute arbitrations.

    The Competing Big Ideas

    Continued Ambiguity. The status quo over sovereignty in the South China Sea has served China well, as the region’s largest power. The country, to date, has been deliberately ambiguous in legally defining its claims and measuring exact boundaries beyond a Nine-dash Line on maps. Further it has not pushed for negotiations to resolve open questions, allowing it to capture the economic benefits of the disputed areas without needing to negotiate de jure sovereignty. Accordingly, China repeatedly stated that it will neither accept nor participate in the arbitration nor be bound by the court’s ruling.

    A Clear Line Drawn. If China loses its claims, a line will clearly have been drawn by the international community and effectively have declared China the aggressor. China has insisted that any and all sovereignty disputes with ASEAN countries be resolved in bilateral negotiations, but has to date failed to engage substantively with any of them, propagating the current ambiguity to its favour. The UN proceedings will reduce the scope for this vagueness and put pressure on China to clarify the nature and scope of its claims, opening the door to concrete counterarguments and a level of engagement that exposes its hand. Japan, Thailand, the Philippines and India are all among the ten countries with territorial disputes with China and for whom this is a strategically important event.

    Potential Outcomes and Implications The arbitration, if comes out in favour of Philippines, would give the country legal weight and credibility for its sovereignty claims, helping it build further seek international support. Despite China’s insistence on bilateral negotiations, a UN ruling and increased regional support would provide the Philippines with additional leverage in any negotiations to take place. A positive UN ruling will also create a precedence case for other territorial disputes in the South China Sea, encouraging Vietnam, Malaysia and Brunei to potentially file similar disputes and exert pressure on China to clarify further its position if not concede to their stances on sovereignty and national interests. As territorial claims widen, China could find itself faced with being boxed in on its other major territories disputes with Japan and India and under pressure on issues such as Tibet, Taiwan and Hong Kong; regardless of where the merit lies, this is an important event.

  4. US Presidential Elections: Domestic Fear Politics vs International Leadership Reasserted

    Background. The US presidential election in 2015 will create the most powerful person in the world for the next four years, with significant influence on global economic, political and security issues. Currently, three candidates are vying for the Democrat nomination, while 14 candidates as seeking nomination for the Republican party.

    Key Dates. The announcement of Republican and Democrat candidates will take place in July 2016; the Election Day will be in November 2016.

    The Competing Big Ideas

    Domestic Fear Politics. Foreign policy and international affairs rarely make the top five list of electoral policy issues and this election is likely to be no different. With voters focusing on the domestic economy, income inequality, and security concerns, candidates are playing to populist sentiments on matters including immigration, free trade and foreign military interventions.

    International Leadership Reasserted. Since the Bush administration’s approach led the international community rejecting US leadership spurred by the “With us or against us” rhetoric surrounding the Iraq War, the Obama administration managed to regain the respect and engagement of the international community. Of the major issues that have been log-jammed between China, Russia and others vetoing the US position at the UN and at other international institutions, the US has led from the front or behind the scenes on Iran, climate change and TPP and has chosen not to be drawn into conflicts in the Ukraine, Syria and the Arab Spring and this has in some quarters been seen as allowing a power vacuum to develop and in others as avoiding being drawn into a proxy war with Russia or into further damaging big wars. There is an opportunity for the next President to decide how best to further US influence without losing the “moral” leadership.

    Potential Outcomes and Implications

    The world is different place than it was in the 1990s where US power and influence last reigned supreme. 9/11 and the rise of global terrorism on the one hand and the emergence of China as a super power on the other hand reduce the relative power of the US to act, and lead unilaterally, and increase the need to work with others to solve pressing issues. However, given the current rhetoric of the presidential debates, a more hawkish government and one less inclined than the current Obama administration to work with China and more likely to confront Russia appears to be highly likely. For China, this would imply a focus on strategic initiatives not in China’s favour, including strengthening the pivot to Asia and US military presence in the Pacific, aggressively pushing the implementation of the TPP and restricting, where possible, Chinese led initiatives such as the AIIB and the New Silk Road and potentially engaging in the early rounds of a Cold War with China, updated for today’s context. In this world, the US might lead a large block of potentially increasingly polarized supporters but not the broader international community.

  5. China Financial Reform: Tactical Liberalisation vs Strategic Financial Opening

    Background. Financial reform in China to date has been slow, yet steady. The ongoing liberalization of financial markets is expected to continue through 2016 and beyond, with a series of initiatives including the free convertibility of RMB capital accounts, Qualified Domestic Individual Investor (QDII) qualifications and a restructuring of key financial regulators announced for next year.

    Key Dates. Capital account convertibility and QDII starting in Shanghai FTZ early 2016; three financial regulators, CBRC, CIRC and CSRC are expected to merge in mid- 2016.

    The Competing Big Ideas

    Tactical Liberalisation. The proposed limitation of key reforms such as capital account opening in the controlled confines of the Shanghai free trade zone is emblematic of the government’s approach to reform to date: the ultimate goal is understood but no clear roadmap has been established, and reforms are implemented cautiously and tactically over time.

    Strategic Financial Opening. China has previously demonstrated that it can open the country and attract huge inflows of capital; its liberalisation of two decades ago made it the magnet for offshore manufacturing for the world’s largest corporations. Other countries and regions have also successfully adopted a strategic approach, that of “Big Bang” reforms that drove strategic financial opening and a surge of economic activity. India’s dismantling of the License Raj in the 1990s and London’s own Big Bang reforms in the 1980s are good examples of this strategy. While China has no shortage of ambitious and far reaching reform blue-prints, most recently the potentially game changing “Blueprint on Comprehensively Deepening Reforms” of 2013, actual reform implementation has remained highly piecemeal.

    Potential Outcomes and Implications

    China’s GDP growth rate is expected to slide below 7%, many analysts already talk about it being 4%. Reversing this trend calls for more radical move. The government’s cautious approach with regards to RMB liberalization is indicative of the importance of RMB control to the communist party. Full fiscal and monetary control have been one of the key levers of China’s managed growth. Removing this lever reduces the government’s control over economic development and the effectiveness of state planning, major issues for the “left” wing of the communist party. However, the current pace of reform may well be the best that is possible in the face of opposition. Indeed, some see the current reforms, slow as they may be, as evidence of the power that Xi Jinping has consolidated in the party, enabling him to push through initiatives over the will of powerful interest groups. However, in the absence of China’s own “Big Bang” reforms, the economic benefits of liberalisation will only trickle in over an extended period of time during which the country’s growth will continue to lag below its potential.

  6. 2016 Summer Olympics in Brazil: US vs China

    Background. The Olympic Games have traditionally been an opportunity for countries to exercise significant soft power, both as hosts and as participants. Brazil, specifically, has slipped into recession in 2015 Q2, and the 2016 Summer Olympics are a chance to restore confidence and restart economic activity growth. To date, Brazil has invested USD11.5bn in venue and infrastructure, already exceeding the final budget of the 2012 London Summer Olympics.

    Key Dates. The Rio de Janeiro Summer Olympics are to take place in August 2016.

    The Competing Big “Ideas”

    US. The US has been a dominant force in the modern Summer Olympics in terms of medal performance, a key soft power battlefield since the start of the cold war, with sports performance considered to be indicative of the strength of a country’s political and economic system. Following the fall of the Soviet Union, the US has led medal rankings in every game other to the Beijing Olympics. However, given that the medal count has lost its strategic significance to the US, its own Olympic performance is less relevant than it was say 30 years ago.

    China. China’s structured and state driven athletic efforts have driven increasing levels of national performance at recent games, culminating in it topping the rankings when it hosted the 2008 Olympics. While the medal count is no longer considered to be a sign of ideological superiority, numbers and rankings matter to a recently emerged country like China, whose citizens expect to see the country with a greater presence on the world stage.

    Potential Outcomes and Implications

    The holding of the Olympics in Brazil immediately after the winter games in Russia and only eight years after the summer games in China, is indicative of the broader global shift to emerging markets, particularly BRICS, despite the recent fall in emerging markets. These countries are playing increasing roles in established international institutions and events (witness the inclusion of the RMB in the IMF’s special drawing rights regime) or forming their own institutions (such as the BRICS Bank). In this light, hosting Olympic games, with their high levels of investment and complex execution, is a sign of developmental and economic maturity, and successful games in Brazil could open the way for a future Indian bid. As an aside, the lessons for India from hosting the 2010 Commonwealth Games will need to be applied well if an Indian bid it is to succeed. India’s efforts were plagued by cost overruns, corruption, shoddy workmanship on sporting venues and by athletes’ boycotts over safety concerns. India will accordingly need to successfully demonstrate that in can execute complex and scaled infrastructure projects, not only to host sports events but more importantly to underpin its continued economic growth.

  7. Indian Elections: Big Reforms vs. Continued Gradual Change

    Background. Elections to the legislative assemblies of key Indian states of West Bengal, Tamil Nadu, Kerala and Assam are due in 2016. Together, these states account for 116 out of a total 552 seats in the lower house, and 50 out of a total 250 seats in the upper house of India’s parliament, and the outcome of these elections will serve, not only as an early indicator of how the 2019 General Elections could shape up, but also determine the pace at which the Central Government will be able to pass big-ticket structural reforms.

    Key Dates. The legislative assembly elections for West Bengal, Tamil Nadu, Kerala and Assam are all expected to take place in June 2016.

    The Competing Big Ideas

    Big Ticket Reforms. The Obama administration demonstrates well how difficult it is to implement one’s agenda without controlling the upper house. The BJP government’s attempts to pass big-ticket economic reforms have so far been thwarted by a lack of numbers in the upper house of parliament. Seats in the upper house are allocated to a large extent on the basis of a party’s performance in the state legislative assembly elections, and with West Bengal, Tamil Nadu, Kerala and Assam accounting for 20% of the upper house’s total seats, the BJP will target making significant inroads into these regions in order to kick start its big-ticket reform agenda.

    Continued Gradual Change. In the absence of upper house numbers, the government has instead focused on passing a number of smaller but effective economic reforms that are focused on improving efficiency and reducing bureaucracy in India’s economy. There reforms have certainly been effective, as evidenced by the improving health of the country’s economy, and will likely remain an area of focus for the government until it strengthens its position in the upper house of parliament.

    Potential Outcomes and Implications

    While the BJP is unlikely to win enough seats to form the government in West Bengal, Tamil Nadu or Kerala, none of which are traditional party strongholds. Materially increasing its seat count in these states could be a key enabler for the government to pursue a more aggressive reform agenda going forward. Important legislation on taxation, labour laws and land acquisition could be pushed through, and India could see step change in its economic trajectory, with growth potentially rising to over 10% in the coming years. On the flipside, a heavy defeat for the BJP in these states will further empower regional political parties, which will expect to see an increase in their bargaining power at both a state and central government level. In the absence of the requisite numbers, or consensus, the government will have no choice but to persist with its incremental reform strategy. And while this strategy may not yield double-digit economic growth, it will likely unlock productivity in key infrastructure and industrial sectors, enabling India to grow at its current 7-8% levels going forward.

  8. US Monetary Policy: US vs. Emerging Markets

    Background. The US Federal Reserve reversed raised interest rates by 25 basis points on December 16, the first time it has done so in more than nine years. This policy action signals an end to several years of near-zero interest rates and the large scale purchases of government bonds and other assets known as quantitative easing, and can be attributed to the revival in US GDP and employment growth over the last 12 months.

    Key Dates. The US Federal Reserve increased interest rates in December 2015, and is likely to continue doing so at different points throughout 2016.

    The Competing Big Ideas

    Benefits to the US. The US Federal Reserve’s decision to increase interest rates is influenced by its belief that the US economy is in a much better place than it was during the global financial crisis. Demand for the US dollar, which has already gained 24% against other currencies since 2014, is expected to continue to rise, while consumer and financial services-related sectors in the US are expected to emerge as key beneficiaries of this reversal in US monetary policy.

    Volatility in Emerging Market Economies. An increase in interest rates is also, however, expected to have major ramifications on the global economy, and in particular, the fortunes of emerging market economies. The strengthening of the US dollar is usually accompanied by a reversal of capital flows from emerging markets. The US Federal Reserve will likely need to balance US economic growth interests with the volatility that its monetary policy actions could cause amongst emerging market economies as it determines the pace at which it intends to increase interest rates over the next twelve months.

    Potential Outcomes and Implications

    The US may well redraw the map of competitive advantage and also confine most developing nations to continue to be developing for even longer. The pace at which the Federal Reserve decides to hike interest rates will play an important role in how the economies of emerging market economies fare. Countries like Brazil, Russia and South Africa, which are overleveraged and heavily commodity dependent could emerge as the big losers if the Federal Reserve sticks to its target of a 1.9% interest rate by the end of 2016. While other emerging market economies will also be closely tracking the Federal Reserve’s actions, countries with strong macro-economic fundamentals like India are likely to be more insulated from US monetary policy than some of their peers.

  9. India: Performance vs. Politics

    Background. The BJP suffered heavy defeats in the Delhi and Bihar state assembly elections in 2015. With some of the momentum from its historic 2014 General Election victory already reversed, and important state assembly elections due in 2016, the party cannot afford to face another set-back. This has led to speculation that Prime Minister Modi may look to shake things up by reorganising his cabinet at some point after the current Winter Session of parliament concludes.

    Key Dates. The cabinet re-shuffle is likely to take place in March 2016, after the announcement of the annual Union Budget.

    Rewarding Performance. With the General Elections three years away, and the BJP government losing some of its political momentum, Prime Minister Modi will likely use the break after the Winter Session of Parliament to assess how his cabinet members have performed. While some ministers, including those staffed with the railways, transport, defence and coal ministries are widely perceived to have performed well, and can expect to be rewarded with an expansion in their responsibilities, others have failed to live up to expectations, and could likely be shown the door.

    Managing Political Considerations. Over and above performance considerations, however, there are also likely to be political factors that determine the nature of the cabinet re-shuffle. Fringe elements that have regularly tried to camouflage their own views as those of the BJP’s may not have performed as ministers, but may yet retain their posts within the government on account of the political backing that they enjoy from the party’s key decision makers and supporters.

    Potential Outcomes and Implications

    Cabinet re-shuffles have often served as an important course-correction mechanism for previous Indian governments. Prime Minister Modi is increasingly setting his sight on the 2019 General Elections, and the extent to which he reshuffles his cabinet will play an important role in determining his government’s reform strategy over the next three years. Rising above political considerations and replacing non-performing ministers with a new set of ministers that are eager to prove their credentials could result in an acceleration of the government’s reform policy. A failure to prune away unproductive members of the cabinet, however, could not only result in a slowdown in the government’s reform agenda, but also adversely impact the public perception of Mr. Modi’s performance as Prime Minister

  10. Paris Climate Accord: Renewables vs Fossil Fuels or United Consensus vs Coalitions of the Willing

    Background. Following the Paris Climate Change Conference, all United Nations member countries will need to ratify the agreement reached, requiring the signatures of the 55 countries that produce at least 55% of the world’s emissions in order to enter into force.

    Key Dates. All United Nations member countries will be asked to ratify the agreement in April 2016.

    The Competing Big Ideas

    Rewards for the Renewables Industry. The Paris Agreement commits all signatories, including the world’s largest fossil fuel consumers like China and India to a zero net emissions rate by 2020. If successfully implemented, this could result in these countries committing significant resources towards the build out of alternate sources of energy. The renewables industry is likely to emerge as the major beneficiary of this trend, with investors deploying an increasing portion of their capital in the solar, wind and hydroelectric sectors. If countries turn their back on traditional energy sources, and in particular, fossil fuels. This transition could have a potentially enormous economic impact, with some analysts estimating that the global fossil fuel industry could incur up to US$2.2tn in cumulative losses over the next decade as a result of the implementation of the Paris Agreement.

    Significant Losses for the Fossil Fuels. The price of oil is $35/barrel, very close to the price post the 2008 global financial crisis. It is worth noting that, with the price of fossil fuels continuing to collapse, this will be considered an expensive option in the short term and so the pace of change may still be slow.

    Potential Outcomes and Implications

    In light of the 2009 climate change Conference in Copenhagen, which ended in disarray and a lack of consensus amongst global leaders, the Paris summit has been lauded by many as a historic turning point in the fight against global warming. While the outcome of the summit cannot be understated, it is important to look beyond the headlines. The language of the agreement is not legally binding, and it is eventually up to each signatory to actually implement the agreement and transition away from traditional energy sources. Within a narrower context, the extent to which countries succeed in this transition will determine the landscape of the global energy industry. But in the big picture, the successful implementation of this agreement can serve as a blueprint for all future global negotiations across trade, human rights, and other geopolitical issues. The term “coalition of the willing” may have found a new home and one that breaks the deadlock at the UN, WTO and other major international bodies on the most important global issues.


  1.   See appendix for definitions and sources