Deglobalization impairs economic growth by reducing trade and addressable markets, though it’s difficult to forecast its scale. Certain trade-dependent nations could be more at risk, but the US economy could be large enough to absorb some amount of shock.
Germany, for example, could face significant headwinds, given its reliance on Russia for energy, China for exports and the US for a defense umbrella. Meanwhile, the US has become self-sufficient in key commodities, and has one of the most robust demographic profiles among developed nations. “Reshoring,” or bringing supply chains back in-country, has been effective so far, thanks in part to fiscal policies. In fact, US manufacturing CFOs are more likely to relocate their supply chains to the US than anywhere else, according to one survey.*
(1.5) Degrees and Climate Change: Regional Impact Will Vary, as Will Opportunities
While the Paris Agreement focused global commitments to reduce greenhouse gas emissions and limit temperature increases in this century to 1.5 degrees above pre-industrial levels, forecasting the effects of climate change on economic growth is harder to pin down. There are multiple effects and linkages, such as rising temperatures and sea levels, more extreme weather events, potential loss of habitats and biodiversity, conflicts over resources and pressure on migration. All these will likely vary significantly across regions.
Among regions, the greatest burden will likely be felt by emerging markets, which provide both the biggest supply of, and demand for, natural resources. They’re also most likely to feel the physical effects of rising baseline temperatures and have the least capacity to cope with climate variability and extremes. Among developed nations, the differences are likely to be more modest. In Europe, production is likely to rise with temperatures, while North America may experience a moderate decline in production, as measured by national output. That said, the US is among the world’s largest spenders on clean energy, bolstered by provisions in the recent Inflation Reduction Act–which creates numerous investment opportunities.
Implications for Multi-Asset Investors
The four secular forces we’ve described will likely create headwinds and opportunities as they reshape the global economic and investing landscape and have meaningful bearing on inflation, growth, and market volatility. That could have significant implications for asset-class return patterns and interrelationships as well as greater returns dispersion across the global markets.
In most environments, there’s usually potential for risk assets to deliver positive real returns over time, especially if positioning remains broad. Stocks serve as a multi-asset strategy’s anchor position for growth, and firms that deliver sustainable earnings growth should be rewarded. In our view, many of these will be US-based companies, and the role of US stocks in multi-asset strategies’ equity allocations shouldn’t be underestimated.
Of course risk assets like equities or high yield credit should be accompanied by diversifiers and other return sources that can adapt as conditions change. For example, with yields likely to stay higher for longer, bonds are a strong income source and diversifier. As always, multi-asset investors should stand ready to refine the mix as conditions continue to evolve.
For more detail on the themes outlined in this blog, please see the white paper Investing in a Post Global World, produced by AB’s Institutional Solutions Team.
