Long ago, it seems, world markets were mounted on a wall of new funds created by central banks, buoyed by enthusiasm for the efficiency and benefits of global trade.
Many bulls in the markets felt that we were in a golden era, where countries and companies would specialize in what they did best, and countries would further remove remaining barriers to allow free and fair trade between five continents.
New fleets of huge container ships, new deep-sea ports and large-scale factories have sprung up to further realize the vision of global trade. China became the factory of the world while the United States was the champion of the Internet, data and social media.
Now everything seems to have changed. Donald Trump, the former US president, was the first to launch a serious challenge by pointing out that China was not respecting the rules in terms of respect for intellectual property and fair access to its own market. He raised doubts by emphasizing the need for advanced democracies to maintain sufficient control over essentials for survival and defense.
Then the Covid pandemic destroyed supply chains and shut down the factories people relied on for just-in-time deliveries; airliners were parked given travel restrictions.
This year, Russia’s unprovoked invasion of Ukraine has led democracies to reassess their dependence on Russian oil and gas as they worry that their purchases are funding war. President Joe Biden is now leading the demands of moral and political questions to shape the pattern of trade.
For some time I have been examining the implications of pursuing greater national and regional economic autonomy. The United States has “Made in America”, the EU checks its digital and resource needs, and China has long followed an economic model in which it secures many of its essential supplies from domestic production. or friendly sources.
Overall global production and efficiency will fall relative to a pure free trade model, but there will be new winners as some countries and regions succeed in creating new capacity to replace imports.
This major shift in strategic objectives underpins the global outlook as markets seek to adjust to three major sets of changes. The digitization movement continues, accelerated by the confinements. Today, more and more countries want to regulate cutting-edge technology companies and ensure that they have sufficient access to the winning technologies of the digital revolution.
There is also a rush to increase microprocessor production capacity in a world short of microchips. The Green Revolution seeks to replace hydrocarbons as the main source of energy in a context of countries wishing to withdraw Russia from their purchases of oil and gas. The environmental, social and governance (ESG) investment movement wants to reward companies that are behaving well, as some leading countries are now behaving badly, posing new moral and investment dilemmas for portfolio managers.
Russia warns investors that there are risks in ignoring poor governance and disregard for international rules of conduct at the country level, as well as at the level of company stocks in a portfolio.
Perhaps ESG should apply to states as well as companies. Russia always looked cheap and was likely to make more money from rising oil prices as the global recovery took hold, but it was easy to say no to such an investment given the obvious shortcomings of the government. That’s what we did with this wallet.
Memories of South Ossetia, Syria and Crimea should have been fresh in investors’ minds before buying Russian stocks. I sold China in this portfolio when I saw the government swing into an autocracy led by President Xi Jinping. While there may be opportunities to make money in the world’s second largest economy, it’s hard to trust a state that imposes new controls on its private property sector, rounds up successful entrepreneurs and has clear objectives to rearm and advance its territorial reach and influence.
The world is in the process of being structured into two large blocks. The Chinese bloc will include a Russia dependent on Chinese support and goodwill. It will press on with great strides to create its own digital and Internet architecture, it will spend a lot of money on weapons and reach as many non-aligned countries as possible along the Asia-Europe Belt and Road, and in the European Ring. islands between China and Australia. The US-led bloc will include Europe, the Five Eyes security group and parts of Central America.
The two blocs will court India, Brazil and parts of Africa. The EU will seek to differentiate itself from certain features of US policy, but will remain dependent on NATO for its defense and will continue to need a lot of US technology in the digital, military and communications sectors.
Inflation remains a pressing challenge in many advanced countries, with price increases reaching an alarming 9.8% last month in Spain and trending considerably higher in the rest of Europe.
The difficult choice still facing central banks is how to curb inflation without slowing economic growth too much.
So far this year, equity and bond markets have fallen, mainly in response to the foreseeable surge in inflation on both sides of the Atlantic. The economic misery has been compounded by the bad news of the Russian war in Ukraine. The fund is down 4% this year, thanks to falling holdings of global equities and indices specializing in global green and digital technologies.
After a few good years of performance, these potential winners have also been hurt by the shift to higher interest rates and uncertainties related to supply disruptions. The fund’s fall was limited by holding a quarter of inflation-linked bonds to provide some protection against inflation and a quarter of cash which has the advantage of not falling in the event of a market decline.
In due course, the bond market will bottom out when people think the major central banks have raised rates enough and brought inflation under control. This will be the time to put more money to work.
Sir John Redwood is Charles Stanley’s chief global strategist. The FT fund is a fictional portfolio intended to demonstrate how investors can use a wide range of ETFs to gain exposure to global equity markets while reducing investment costs. [email protected]