December 2023


The geopolitical macro regime of the 2020s

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“Plateauing” globalization in the form of increased economic protectionism at the national level – and cross-border trade coalescing into regional blocks – will spell increased equity market volatility and inflation at a higher level than its post-financial crisis averages.

Speaking at State Street LIVE: Research Retreat 2023 in London this month, State Street Global Advisors’ head of macro policy research Elliot Hentov warned the “carousel” of globalization that had been gaining speed since the 1980s “has turned.”

“That carousel stopped during the pandemic, and then with the war in Ukraine and Russia it has now turned,” he said. “It's not spinning [in the other direction] as fast as it was spinning for 30 or 40 years, but it has turned. The sign has gone from a plus to a minus.”

In terms of the effect of this change on global investors, he cited shorter supply chains having an inflationary impact and the shrinking of markets for businesses. He added that the domestic and geo-political impulses that drove this swing in the direction of globalization would be supplemented in the coming decades by economic directions.

Discussing “supply shocks” in raw materials like germanium, gallium and graphite that have already happened, Hentov pointed out they are essential components of “the technologies of the future,” particularly decarbonization. “[In this relationship between future technology and supply shocks], you have a brief explanation of why decarbonization is so problematic and where geopolitical risk sits,” he added.

“[Economic competition flashpoints] don't sit at the source fighting over who has access to oil or who has access to cobalt and lithium, but who has access to the infrastructure and the framework to develop the industries of the future and basically be economically dominant.”

A move towards more economic protectionism would mean not just attempts to take manufacturing away from rival countries and blocks, as the US has been pursuing with China, but also inward investment, as with recent US infrastructure and technology investment legislation.

Data shows a three standard deviation in US public Capital Expenditure (CapEx), which he anticipated would have “a very high fiscal multiplier” and “deliver a productivity impulse to the rest of the economy.”

He added X-border trade and investment flows will not shrink as much as might be expected in a de-globalizing world, because they would shift from truly global flows to intra-regional ones. But he cautioned: “A Germany-China transaction is not the same as Germany-Poland, even though it may show up on the data as the same.”

For investors, he said the new geopolitical and global trade environment had four key elements:

  • The era of low asset price volatility is over
  • Inflation will be higher in general but also more volatile, with alternating demand and supply shocks
  • Rates will be higher in response to more volatile inflation
  • The “outperformance gap” between the types of stock that benefited from the era of globalization – “DM particularly US large cap, large cap that have had that outperformed for so long” – will shrink

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