The world is becoming a bigger, not a smaller place, a process financial markets and investors may not enjoy.
A number of the biggest stories for markets – from the UK elections on Thursday to Greece’s default drama to new opposition to the proposed Trans-Pacific Partnership trade agreement – have de-globalisation at their core.
De-globalization is the partial unwinding of the long-running shift to arrangements that allow capital, goods and services to move more freely around the world.
A complex array of forces and interests in opposition to globalisation has emerged since the financial crisis. They range from national governments seeking more control over the banks whose risks they insure to politicians and labour unions in richer nations arguing that globalisation threatens the jobs and incomes of those in the middle while concentrating gains at the top.
Evidence that globalization is under fire is easy to find:
Britain’s May 7 election, unlikely to return a majority for any party, embeds within it twin threats: to British membership in the European Union or to Scotland remaining within the United Kingdom. Prime Minister David Cameron has pledged a referendum on British membership in the EU by the end of 2017 should his Conservatives win. Surging support for the Scottish National Party, which is pledged to independence, makes it a more likely power broker and may raise the now slim chances of another vote on Scottish independence.
Britain’s biggest bank, HSBC, said it may move its headquarters out of the country in the wake of “regulatory and structural reforms” imposed after the 2008 financial crisis. The bank also cited concern over whether Britain will stay in the EU. Those reforms, which left Britain with some of the tightest banking regulations, were themselves a form of retreat from globalisation, as would be leaving the EU.
The wrangling between Greece and its eurozone partners over its debts may ultimately result in its exit from the single currency, a project that is partly predicated on the desire to capitalise on the forces of globalisation.
Or consider the sudden run of play against the TPP in the United States. The idea of easier and growing trade as a force for good is central to globalisation, whose backers believe that the economic growth trade brings can benefit all segments of an economy. An unusual coalition of left-of-center Democrats and right-wing Republicans has emerged to threaten the TPP, which would cover 40% of the global economy if President Obama can push it through. Opponents offer a variety of arguments depending on their orientation, notably fear that US jobs and incomes will suffer due to heightened global competition.
Less tightly integrated
Growth in global trade, a key indicator of the pace of globalisation, is slowing. Trade volumes fell 0.9% in February and 1.6% in January, according to the Netherlands Bureau for Economic Policy Analysis. What’s more, trade has expanded at only about the rate of global economic growth since the financial crisis, having usually comfortably exceeded GDP growth in previous years.
Cross-border capital flows have also not returned to their pre-crisis peaks, an indicator that the world’s financial system is less fully integrated. That’s partly because that integration was partially a result of risk-taking now deemed unwise, and partially because of the kinds of regulations that concern HSBC. Countries now have better reason to erect gates around their financial systems. This is both to limit their own liability in the event of crisis, but also to better route funds toward their own ends and financing needs.
If globalization led to stronger growth but less-equal distribution of the proceeds, then de-globalization may well produce the reverse. That is, slower growth but more equal distribution may or may not be desirable, depending on your point of view. It almost certainly is not if you are an investor or financial market operator and want to maximize profits.
If the forces of de-globalisation succeed, two implications for investors are easy to tab. Firstly, growth will be lower, which will have a read-across to asset prices, very likely forcing them lower. As well, more equal distribution means lower corporate profit margins, which also will force asset values down.
Secondly, if the world’s economies and markets become less tightly connected, they will become less tightly correlated. A capital market with higher barriers to entry will have a tendency to go its own way. That may improve the benefits of diversification.
De-globalisation, if it happens, will be a slow, bumpy, and for investors, painful process.
(At the time of publication James Saft did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund. You can email him at jamessaft@jamessaft.com)
