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Investing in a less stable world

The world is no longer dominated by one or two great powers – other countries and power-blocs are making their influence felt.

3 min read

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Thirty years ago, when the Berlin wall fell, it was heralded by the historian and author Francis Fukuyama – as ‘the end of history’. The victory of capitalism over communism was seen as an indication that the political and economic influence of the USA was now unassailable.

In the 2010s, however, the situation has gradually changed, it seems...

’Multipolarity’ probably best defines the new world that appears to be emerging, and is an idea that frequently discussed in political publications, with investors starting to take note. While the US still has pre-eminent influence over the global economy and markets, investors need to start paying more attention to how power blocs like the EU and burgeoning economies like China and India are flexing their muscles.

POLITICAL AND ECONOMIC INFLUENCE

Geopolitics has become more dynamic and unpredictable for both politicians and investors. While we are data-driven investors, the increasing number of real or would-be competitors to the US merits attention given its implications for longer-term economic growth. We are increasingly taking a more nuanced view of these macro factors in our investment approach to make sure we’re alive to opportunities – and potential risks – that arise.

Redefining our relationship with China

The clearest example over the last few years has been the US-China trade conflict. Today’s tense trade relationship between these countries was born in the globalisation trend of the 1990’s. This was established largely by the US, under the auspices of the World Trade Organisation, coordinating an extensive system of global trade as the leading central power.

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Since then China has gained in importance and power and the US is trying to preserve its advantage.  This doesn’t mean both countries will stop trading with each other, but it does mean that the nature of  trade is likely to change in the future. Supply chains will alter and trade in perceived sensitive products – notably technology – will be constrained.

At the same time other powers may attempt to fill the gaps that are opening up. Russia and the EU may be willing to supply goods to China that the US has blacklisted, which in itself will open potential new conflict points again.

A Changing world means new opportunities

As with all change, we see new challenges and opportunities to watch for in the shifting dynamics of the US-China relationship:

  • Redefining established supply chains will be expensive, but could bring fresh opportunities for investors
  • Developing countries such as India, Vietnam, Philippines and Indonesia could stand to profit as companies seek alternatives to China
  • Companies from  Europe, Japan or Brazil could fill places abandoned by US companies as a result of trade tariffs or protectionism in areas like technology
“China is very keen to attract foreign investment, but realistically there are likely to be limitations on how investors can access the market in the longer-term”

The impact for financial markets is less clear. China is very keen to attract foreign investment, but realistically there are likely to be limitations on how investors can access the market in the longer-term. Technology investments come immediately to mind, but the US this year has also started to look into Chinese access to capital markets by exploring the idea of limiting the inclusion of Chinese securities in international debt indices. 

The 2020s will see more evidence of a multipolar world emerging. It is widely recognised by now that the US/Chinese rivalry is only in its early stages and will be an ongoing event of the 2020s. Other areas of potential conflict in Asia – territorial issues in the South China Sea or the status of Taiwan - or the complex interactions in the Middle East with its oil reserves can also trigger political volatility for markets.

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Key Takeaways

  • The framework of global trade is  becoming more complex and fragmented
  • The US is backing away from its leading global role, while other countries and regions – China, India, Russia and the EU – are becoming gradually more politically and economically influential
  • We’ll be paying more attention to geopolitical movements and what they mean for different asset types and industries as global relationships develop

When investing, past performance should not be taken as a guide to future performance. The value of investments, and the income from them, can go down as well as up, and you may not recover the amount of your original investment.

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