Investing without foresight invites significant risk to client portfolios. As fiduciaries, we have an obligation to explore how current trends may impact our collective economic future, and in turn, how they may affect our investment strategy. Combining research with independent thinking leads us down exciting roads, and in our current environment there are significant, sweeping developments that provide context for our approach.
The key trends today include the growth of globalization, aging demographics, the acceleration and adoption of technological change, and the effect of these factors on the world populace. Critically, though, the overarching response to these drivers is an unwinding or devolution of globalization—a return to isolationism among the world powers.
In researching an expanded view of these issues, I focused primarily on insights from noted economists and policy strategists Parag Khanna, Peter Zeihan, Joseph E. Stiglitz and Mohamed A. El-Erian—all of whom have extraordinary insights, academic pedigree and senior global policy experience. In Zeihan’s view, as the world devolves, at least the United States will be a good place to live and invest. That’s not to say that our financial markets and economies would be in for smooth sailing. I’d expect just the opposite, with high volatility creating long-term opportunities.
Only Khanna seems overtly optimistic that the current state of world globalization will not only deliver a better standard of living to the world populace but accelerate towards what could be the next Renaissance. As technological change enhances our abilities to become more productive, as renewable energy technology improves and replaces oil, as interdependence on resources and communication increase exponentially, the world becomes a much better and safer place. I would position Stiglitz and El-Erian as hopeful that globalization can be saved.
The caveat is these outcomes are dependent upon leadership, vision and policy that get implemented in a timely manner. In my opinion, it is hard to say with any intellectual honesty that we can expect that to be the most likely case.
While there is no way to state unequivocally which way the future will trend, exploring possible outcomes can serve as a directional checklist as we gauge our path. There are myriad events that play into the issues; with that in mind, here are three questions that herald the decline of globalization:
1. Why did Populist movements in France, Italy, England and the United States make such dramatic strides in upsetting the global order?
Nobel Prize Winner Stiglitz wrote, “The disparity between what was promised from globalization and what was delivered has angered many and led to a growing distrust of the elites—in politics, media and academia.” (Globalization and Its Discontents Revisited, Anti-Globalization in the Era of Trump, 2018)
This inequality is what leads to discontent and politics of anger and populism worldwide. It seems a straightforward assertion that if large segments of the population are worse off, they will vote with their wallets and elect those who claim to have a better way forward. Thus, we arrive at today’s world of Populist politics, a world in which the United States incites trade wars, becomes more confrontational and protectionist, and is less supportive of allies around the world.
2. How will immigration policy play into cross-border growth?
Mass migration has become a common theme over the past decade, with huge swaths of regional populations displaced due to war, drought, and untenable economic conditions. There are tremendous cultural and economic implications of introducing a significant demographic shift into a country in a short time frame. Done thoughtfully, it has the potential to forge unity and expand access to skillsets and labor. Done without an emphasis on societal integration, it has the potential to increase economic disparity and lend further momentum to isolationist polices.
3. How does energy strategy impact the outlook for trade and globalization?
In many ways, U.S. access to shale stands at the center of a restructured world order. With new technologies like horizontal drilling combined with high power hydraulics referred to as fracking, the energy industry is now able to harness these massive deposits profitably below $50/barrel. Globally, known shale deposits represent more oil than Saudi Arabia and Russia have combined. Much of that resides in the United States, which is why we are no longer dependent upon international oil imports.
Energy independence is what allows the United States to remove our carrier group from the Persian Gulf. This alone fundamentally alters the geopolitical landscape. The Persian Gulf and its surrounding states represent in excess of 30 percent of world oil production. Therefore, it has been critical for the United States to maintain open trade routes for the oil to flow.
These and other factors lead us to believe that over time, the global order will devolve into significant regional trading blocs. They are not all that different from today’s global economy, but with greater economic integration within each bloc. I could see a North/South American trade zone that runs from Canada to southern Argentina. Strong regional compacts including China, Russia, India, Japan and South Korea could dominate Asia. International trade would become a bit more bifurcated by region as a product of regionally focused re-industrialization enabled by new technologies such as 3D printing. Issues of cyber security and national security of productive capability will help push in this direction, as well.
From an investment perspective, this keeps us aware of potential risks and opportunities. For example, investments in key integrated energy companies might make sense as Russia and the Middle East devolve into regional conflict. As major oil producing areas become less stable, companies capable of delivering critical supplies, technology, and infrastructure worldwide could be in high demand. Longer term investments in companies with leading edge technology in areas such as 3D printing, robotics, artificial intelligence, technology infrastructure and communications will could prove to be highly profitable as those areas grow in economic importance. In the United States, if we get public policy leadership in the realms of education, training, and infrastructure, we could see rapid growth in those industries. Importantly, avoiding investments in expensive industries with demographic and technological headwinds will help to insulate portfolios against these significant structural world changes.
By now it should be evident that in a world becoming increasingly smaller due to technological innovation, seemingly disparate issues are in fact directly related. Changing the nature of the geopolitical order implies potentially major change to how business is done. Whether the change is being driven by competing governments, economic systems, public policy, ideology, technological
change, demographics or even religion, it helps direct policies that create better outcomes. Understanding the root causes of the movement towards change better informs the responses as to what is likely or feasible. The intersection of these interrelated issues is where we need to focus our leadership, our resources, and our energies in order to ensure that the real world ends up with more positive outcomes in the wide range of the possible.
We recognize that such big picture trends take years, if not decades, to influence market direction, and we do not view our research as a conduit to market timing. We always bear in mind, however, that understanding the markets means understanding the course of policy, international relations, and the way regional economies interact on the global stage.
Paul Cantor, CFA, AIF, CFP, is principal and chief operating officer at Allegiant Private Advisors.