How to Invest in a Post-Global World

When we look at the big trends that are set to define the investment landscape, we think that the shift away from a globalized world is central. This has significant implications for the macro environment and asset allocation.

We see two forces at work that suggest deglobalization is a persistent trend. One is geopolitics, in particular the tension between China and the US. The second is domestic opposition to globalization in advanced economies where there is a strong perception that the benefits of globalization have not been shared.

A key claim from our research is that deglobalization leads to higher inflation. This is a popular topic at the moment. But we think there needs to be a distinction between near-term inflation and the more strategic prospect. The prospect of very elevated inflation over the next couple of years is driving the hawkish turn of central banks.

However, over longer horizons, the forces at work on inflation are different. We think that deglobalization leads to higher inflation as it puts limits on the global pool of labor, thereby removing one of the major forces that has given corporates the ability to drive down wages. This also points to a change in supply chains, which again is inflationary.

Big trends like this don’t happen in a vacuum. When projecting the implications for capital markets, one has to consider the broader picture. And there are two parallel forces that point in the same direction.

One is demographics. The global pool of labor, ex Africa, is set to decline from here. Other things equal, this implies more bargaining power to labor. Admittedly, this is potentially offset by automation and there is a lively debate about the relative scale of these two effects.

In addition, we claim that ESG is inflationary. Here we consider ESG as a sociopolitical force rather than narrowly thinking about it as a mode of investing. When people associate ESG with inflation, the immediate assumption is that this is about energy prices and the cost of the energy transition. Indeed, this will likely be significant in coming years. However, as we extend the time horizon out further, we think that the “S,” or social, becomes more significant as an inflationary force, as it implies a higher path of wages.

When one considers the winners of globalization, it is in general not specific countries, though some like Germany do stand out. We argue that the bigger winner has been capital in the form of investors. We think that deglobalization in tandem with these other forces implies a shift in the balance of power between capital versus labor and leads to a higher equilibrium level of inflation. Specifically, this would lead us to expect US inflation to be close to 3% in 10 years’ time.

There are other implications of deglobalization. One is that investors should expect a much higher level of government involvement in the economy, e.g., around the issue of supply chain security.

One finding is that inflation protection needs to remain a strong long-term concern. It also points to the ability to extract from diversification from regional allocation. Portfolios should be structured to try to take advantage of this and use it to make up for the lost diversification between stocks and bonds.

Some specific views emerge from this analysis. For example, the process of relocating production implies a long-run tailwind for automation. And we can show that the companies involved in this area have been de-rated recently given their growth-like nature.

We think this outlook may challenge the assumption that in the long run international markets outperform those in the US. Even in the face of de-dollarization, we suggest that the US is relatively less exposed to many of these strategic risks.

However, we do suggest that the mega-cap companies are set to lose their edge, as they have been major beneficiaries of being able to sell and spread costs and taxes globally.

In conclusion, we think that deglobalization is set to be a persistent characteristic of our world, undoing or weakening many of the investment trends since the early ’80s. This has strategic allocation implications that are not reflected in many portfolios today.

Thank you for your time.