From globalization to a “zero-sum” game
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Modern economic growth and policy have been fueled in large part by a shared vision of global order and cooperation, with an end goal of achieving positive outcomes that can benefit all participants — the “globalization” theme that has dominated macroeconomic discussions for the past generation.
Recently, however, globalization has begun to backpedal amid rising populism and a renewed emphasis on global competition over cooperation. Government policies are now increasingly influenced by the concept of a “zero-sum” game: To win, somebody else has to lose. Accordingly, policymakers worldwide are intent on ensuring that their nations’ economies and populations are not left behind.
While “deglobalization” will take time, the COVID-19 pandemic has helped put the world on a faster track to a less synchronized global economy. Ultimately, this should lead to meaningful disruptions, disparities, and divergences globally and, in turn, to potentially compelling investment opportunities. We believe active management, rooted in deep analysis of relative value across countries and sectors, is best suited to navigate this dynamic environment.
Deglobalization is slowing global trade
Some early results of deglobalization are apparent in the plateauing levels of global trade activity over the past dozen or so years. As shown in Figure 1 , global trade as a percentage of the world’s gross domestic product (GDP) has not really grown at all since the peak it reached just prior to the 2008 global financial crisis.
FIGURE 1
Recent trade policy steps taken by the US and China have not only grabbed headlines, but have also served to further restrain global trade. Indeed, former President Trump even went so far as to frame US-China trade frictions in the context of a “zero-sum” world. The degree to which those tensions might ease with President Biden now in office remains to be seen, but in any case, slowing trade is a global phenomenon and symptomatic of a broader paradigm shift — one we believe is likely to persist.
Near-term implications
Deglobalization (like globalization before it) will of course be a multiyear process, but its implications can accrue swiftly and have recently been accelerated by the widely varying individual country responses to COVID-19. Potential near-term implications of deglobalization include:
- The return of volatility : Over the past 10+ years, powerful government support in the form of ultralow policy rates and massive quantitative easing (QE) has dampened asset-price volatility globally. While front-end rates are likely to remain low for the foreseeable future, we do not expect volatility to stay suppressed, especially in currencies and long-term rates.
- Credit spread widening: Fixed income credit spreads and many bond prices may come under mounting pressure in the period ahead, as emerging market economies and their smaller developed market counterparts are more or less left to “fend for themselves” in an increasingly isolated global economy.
- Dispersions in sovereign interest rates: Higher sovereign-debt risk and the prospect of rising inflation on the horizon may create significant dispersions across sovereign-bond interest rates, excluding the front end (which, as noted above, is likely to remain pinned).
- Higher odds of exogenous events impacting economies: A declining commitment to global cooperation may weaken global institutions and alliances, potentially leading to less coordinated (and less effective) reactions to geopolitical and public-health crises.
Investors, who have long been lulled into complacency by accommodative government policy, should be prepared for the new paradigm. The risk-taking that rewarded many investors over the past decade could prove problematic going forward, as strategies that rely heavily on beta and carry may underperform. Many global governments have little or no ammunition left in their stockpiles. As such, any additional support they provide is unlikely to be as plentiful or to have the same “calming” effect on markets. In fact, recent comments by central bankers suggest that QE may be nearing its limits.
