- Trade disputes are likely to remain a key intermediate-term risk for investors.
- The same forces that have caused trade disagreements could potentially facilitate their resolution.
- Economic interdependence among nations has never been higher nor more important.
Two primary issues drove the downdraft in global markets over the final few months of 2018: the threat that rising interest rates could slow economic growth and the reality that rising geopolitical turmoil was already adversely impacting global momentum.
Rising interest rates are normal for almost any given economic cycle. Granted, central bank interest rate policies have been unusual over the last decade, but the fear of rising rates is still based on the same basic economic math — borrowing costs could be pushed too high or too fast, causing an economic downturn. We are doubtful that such an “interest rate overshoot” will occur over the near-term, but the issue is likely to remain a concern for investors nonetheless.
Geopolitics are also a "constant" in analyzing the economic or financial market outlook. Unfortunately, the present environment seems to offer more geopolitical risk than it has in decades.
The world’s two largest economies, the United States and China, are in a bitter trade dispute, while the world’s fifth largest economy, the United Kingdom, is seeking to separate itself from the largest regional alliance in modern times, the European Union — a process often referred to as “Brexit.”
Examining today’s tensions through the lens of globalization, however, could help us understand how such disagreements were created and how they may resolve.
Globalization in today’s volatile environment
The expansion of international trade, business supply chains, open markets and cross-country investment, often referred to collectively as “globalization,” have been a catalyst for global growth for centuries. The “one world market” concept, however, accelerated over the last few decades with the establishment of the World Trade Organization (WTO) in 1995 and China’s entry into the WTO in 2001. No singular factor has likely been more influential in the modern era, however, than the internet. As it is a fixture in our daily lives, it’s easy to forget that the World Wide Web only first became publicly available in the early 1990s.
Such dramatic changes rarely come without friction, as evidenced by the widespread worker protests seen during the early days of the Industrial Revolution.
The benefits of global dependencies
Globalization naturally creates competition, which of course can lead to disputes. Its positive influences, however, are powerful. As global markets become more interdependent, it forces nations to work together; any major nation that tries to violate established rules is likely to suffer economic consequences.
Even the threat of war becomes less tenable as military equipment, supplies and components are sourced globally. To wit, today, economic sanctions are often placed on global "bad actors" such as North Korea, Iran and Russia. Sanctions do not always reverse bad behavior, but they are often effective in containing it.
Such forces offer a very strong incentive for leaders to find agreement on a standard set of global rules that will benefit global growth and living standards for many decades to come, in our view. It's commonly believed that some areas of disagreement between the U.S. and China could have been avoided if WTO rules had been adjusted in 2001 to adequately address China’s somewhat unique economic system.
Where do we go from here?
There’s no telling as to exactly when geopolitical tensions will ease, and unfortunately there remains the potential for current trade disputes to get worse before getting better. A thoughtful analysis of how the forces of globalization may have shaped the issue, however, can help investors avoid emotional reactions to short-term headline news that could derail long-term financial goals. We believe the incentives to find common ground are overwhelming, and financial markets are likely to respond quite favorably when such developments occur.
Investors are no longer able to ignore developments or events transpiring in distant lands by investing in domestic companies alone. Increasingly, publicly traded companies, whether they are based in the U.S., Europe, China, Japan, India or anywhere else, are global in nature. For better or worse, investing today requires a global perspective. Talk to your financial advisor to make sure your portfolio is properly situated given the realities of today’s global economy, and talk about what it means to stay the course to reach your financial goals, rather than reacting emotionally to headline news.