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That’s a wrap on summer, folks. Beaches have emptied, commutes have lengthened, and calendars are filling up. Across the globe, you can hear the collective sigh of relief from parents with young kids as they settle back into the rhythm of daily routines. All the usual September stuff is unfolding as it should.
But in 2024, the political calendar has been anything but routine. Countries with more than half the world’s population – over four billion people – will send, or have already sent, their citizens to the polls. The congested electoral calendar includes the most divided (America), most disgruntled (Britain), most populous (India), not to mention those front lines of the free world (Taiwan and conceivably even Ukraine). No wonder investors are skittish – the potential for major policy changes is enormous.
Of course, America remains uncontested in holding the world’s rapt attention. And why shouldn’t it? Forget the overdue and sensible retirement of Joe Biden or the recent unhinged presidential debate. The U.S. has long been the architect of the post-war global order, shaping the institutions that define it. Now, for a second time, Trump threatens to take an even more destructive wrecking ball to these long-standing alliances. He also tells us that as President he will have direct say on when and how the Federal Reserve sets interest rates, claiming that – you guessed it – his own instincts are better than the people who work at the Fed (note to Trump: Nixon already tried this in 1972, and the results were less than encouraging). While America’s reputation may be in decline, its captivating hold on the rest of humanity is clearly not.
Yet while November’s U.S. election remains pivotal, the multitude of elections worldwide presents an even broader canvas of change. As countries vote in new leaders, their relations with America are central to election discussions. In today’s multi-polar world, many nations are re-evaluating their approach to trade, diplomacy, and security with the U.S., recognizing the need to engage more broadly with other global players and diversify their partnerships.
Big government has also made a comeback across the Western world. The language of subsidies, protectionism, and state-led industrial strategy are once again at the forefront of political discourse. Trade is fragmenting along geopolitical lines, and fresh cracks are appearing in the plumbing that underpins strategically important sectors – whether in 5G networks, electric vehicles, or critical materials essential to the green transition.
In America, despite substantial differences in policy platforms between Democrats and Republicans, there’s one major point of convergence: Both parties are aggressively pursuing protectionism, particularly through the use of tariffs. This trend isn’t isolated to the U.S. either – other developed nations, including Canada and within the EU, are following suit. Notably, Canada recently announced it would match the U.S.’s 100% tariffs on Chinese electric vehicles.
The rest of the world is watching this protectionism closely. For example, during Mexico’s election in June (where we visited and published a report on our findings), local investors acknowledged that the U.S. results in November could hold more significance for Mexico than its own. While Mexico has been a near-shoring favourite in recent years, Washington now accuses them of serving as a backdoor for Chinese exports and circumventing U.S. import tariffs (it is difficult to refute this: Mexico’s imports from China are nearly 50% higher than pre-pandemic levels). America could easily turn on Mexico, especially with the United States-Mexico-Canada Agreement up for review in 2026.
Elsewhere in the world, protectionism is not on the rise. In fact, many emerging market nations are actively engaging in regional alliances and trade partnerships, signaling a shift towards more, not less, interconnection. Multi-lateral trade agreements are being swiftly signed. Settlement of bilateral trade in national currencies other than the U.S. dollar is rapidly increasing. Supply chain diversion is also powering a manufacturing revival and investment boom outside of China. The last EM boom in the 2000s was driven by China’s rapid industrialization phase. Crucially, this new phase extends far beyond China with far deeper participation.
India, the world’s fastest growing major economy and a country that we track closely, is a case in point. Prime Minister Narendra Modi, who was elected for a third consecutive term in June, has focused less on protectionism and more on enhancing India’s competitive position globally. This has meant more integration with other nations, positioning itself as a viable alternative in global supply chains and encouraging foreign investment while building domestic capabilities. Unsurprisingly, the country’s trade with other nations is soaring. The most important result has been India’s upswing in its capital expenditure cycle. Long deficient in critical infrastructure, the investment share of GDP has recently reached 35%, a record high, and among the highest in the world (for comparison, China reached 45% during its blistering industrialization phase). More interconnectedness has led to higher growth.
What key theme can we pull out of all this? At the risk of stating the obvious, protectionism is not a positive trend for global growth. Trade restrictions hurt economies as they tend to raise production costs while inviting costly retaliation from trading partners. Although many politicians are appealing to voters by fixating on the negatives of globalization, adopting anti-trade policies would also unwind the positives of world integration and lead to a painful long-term economic adjustment process.
Tariffs, specifically, are also economically illiterate, prescribing bilateral remedies for more complex problems. Consider that America’s massive trade deficit reflects imbalances with over 100 countries. In a world with globalized supply chains, slapping tariffs on China simply diverts trade to higher-cost foreign producers – the equivalent of a tax hike on U.S. consumers.
This is already in play. A set of “connector countries” are rapidly gaining importance and serving as a bridge between the U.S. and China, reducing efficiency but keeping supply routes viable. Ironically, this has brought resilience to global trade and activity but at the cost of higher inflation and higher private sector borrowing costs in tariff-imposing countries. Protectionism, contrary to recent claims, consistently results in self-inflicted economic harm.
One of the most important questions arising from the current geopolitical landscape is the direction of the U.S. dollar. The consensus suggests that a U.S.-led trade war would boost the currency. We caution against that view. If the U.S. were to impose more aggressive tariffs on its major trading partners – a likely outcome regardless of the November election results – it would directly weaken U.S. consumption and increase U.S. inflation relative to other countries. Both of those factors are U.S. dollar bearish.
Over the long-term, protectionism would also undermine the U.S. dollar’s status as the world’s primary reserve currency. In the shorter-term, however, political instability alone can drive capital flows away from the U.S. We have already observed this with the weaponization of the dollar following the outbreak of war in Ukraine, which quickened moves by various countries to avoid U.S. dollar assets in favour of gold and assets within their own borders.
All of this is unfolding at a time when the U.S. dollar index is overvalued at comparable levels with past secular peaks in 1985 and 2002. Additionally, the currency’s traditional safe-haven role appears to be diminishing, recently declining alongside other risk assets during the August market selloff.
Adding it all up, the best strategy for investors is to maintain broad diversification across multiple foreign currencies. This approach aligns with our investment team’s objective in Forstrong’s flagship Global Balanced strategy, which launched as an ETF on the TSX this week Forstrong Global Balanced ETF (TSX: FGBL) and seeks to capture the significant income and growth opportunities worldwide, while tilting towards the currencies with the most favourable fundamentals.
Tyler Mordy, CFA, is CEO and CIO of Forstrong Global Asset Management Inc., engaged in top-down strategy, investment policy, and securities selection. This article first appeared in Forstrong’s Insights page. 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 X at @TylerMordy and @ForstrongGlobal.
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Content © 2024 by Forstrong Global. All rights reserved. Reproduction in whole or in part by any means without prior written permission is prohibited. Used with permission.
The foregoing is for general information purposes only and is the opinion of the writer. The author and clients of Forstrong Global Asset Management may have positions in securities mentioned. Performance statistics are calculated from documented actual investment strategies as set by Forstrong’s Investment Committee and applied to its portfolios mandates, and are intended to provide an approximation of composite results for separately managed accounts. Actual performance of individual separate accounts may vary with average gross “composite” performance statistics presented here due to client-specific portfolio differences with respect to size, inflow/outflow history, and inception dates, as well as intra-day market volatilities versus daily closing prices. Performance numbers are net of total ETF expense ratios and custody fees, but before withholding taxes, transaction costs and other investment management and advisor fees. Commissions and management fees may be associated with exchange-traded funds. Please read the prospectus before investing. Securities mentioned carry risk of loss, and no guarantee of performance is made or implied. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice.
Image: iStock.com/Olivier Le Moal
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