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Turning to the grand canvas of geopolitics, it cannot be ignored that globalization was once sold as a bridge to peace and higher profits for all. Instead, it has become a new battleground. On the surface, the Russian invasion appears to be the end of the era of unfettered globalization – three decades of fitful progress thrown into reverse. The new type of sanctions-style warfare, a financial “shock and awe,” amounts to the most aggressive unplugging of a financial and commercial system as one can imagine. The risk is that countries other than Russia could be next.
What happens now? As the German Chancellor, Olaf Scholz, has declared, we are indeed at a zeitenwende: a pivot point. Consider that the Russian president, Vladimir Putin, has unintentionally created a most rare thing in today’s polarized world: a consensus. The invasion of Ukraine has done what nothing else, not even a global pandemic, could do: show the difference between right and wrong with such clarity that nearly everyone is in agreement. This has galvanized support right across the world. A divided America is at least united on this one issue. A fractured EU is fostering greater cohesion. The West is more unified and determined than it has been for decades. Putin has effectively delivered a shock to the democratic world that restored its heartbeat.
What about China’s role in all this? For all the feverish talk about the war in Ukraine ending the globalization of trade, there is actually far less action than substance. What is far more likely is that existing regional trading blocs will be further developed, with some minor regions of these systems cut out. What remains striking about China is the extent of its economic interdependence with the rest of the world, despite rising geopolitical tensions. In 2021, the U.S. still imported more goods from China than any other country and exported more goods to China than any other country, with the exception of Canada and Mexico.
Foreign engagement is likely to continue to reflect the economic reality of China’s high level of global connectivity, even though tensions will stay elevated. Lastly, it should be noted that China is now the only major economy that can deviate directionally from those of America. As China re-opens, macro-minded investors need to keep this closely on watch.
Of course, geopolitical risk remains elevated. But let’s not kid ourselves: Economics still trump politics. Global governments are showing that shrewd multipedal political maneuvering can keep cross-border trade booming. For example, the International Energy Agency reluctantly admitted that recent Western sanctions against Russia have had limited impact on their oil output. The country’s current account surplus swelled to a record US$138.5 billion in the first half of 2022, as energy flows quickly rerouted to other countries like India and Turkey. Or, consider that amid increasing U.S.-China tensions, Covid lockdowns, and ongoing hefty tariffs, China’s exports have continued to gain global market share, underscoring the attraction of the country’s global competitiveness.
The pro-globalization consensus of the 2000s is being replaced with a more critical version. All of this may drive investors into the perceived safety of developed markets. But gloomy moods about globalization miss where the large emerging markets stand in their structural reform cycle. The crises of the late 1990s forced many of these countries to fix their finances, setting the stage for booms in the 2000s. The excesses of the 2000s then led to a lacklustre 2010s. Now, forced again to reform by the pandemic, they are set up for another solid run.
Emerging markets are also ahead of the global policy curve. Usually, the Federal Reserve is a leading indicator of what EM central banks will do. This time, under pressure from weaker currencies, their central banks started tightening in early 2021, a full year ahead of the Fed. As a result, they now have less work left to do in the fight against inflation. For the first time in at least two decades, the share of countries suffering rapid inflation (i.e., above the level of 5%) is higher in developed markets than in emerging ones.
The Ontario Municipal Employees Retirement System aims to triple its assets in Asia Pacific over the next eight years. Forstrong’s investment team is also positioned for a long period of outperformance and re-rating of select emerging markets.
Tyler Mordy, CFA, is CEO and CIO of Forstrong Global Asset Management Inc., engaged in top-down strategy, investment policy, and securities selection. The Forstrong Global Investment team contributed to this article. This article first appeared in Forstrong’s “2023 Super Trends Report: Metamorphosis” publication available on Forstrong’s Global Thinking blog. Used with permission. You can reach Tyler by phone at Forstrong Global, toll-free 1-888-419-6715, or by email at tmordy@forstrong.com. Follow Tyler on Twitter at @TylerMordy and @ForstrongGlobal.
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