The total value of goods and services traded across international borders has increased exponentially over the last 50 years. As trade barriers were systematically dismantled, the world’s major economies became more intertwined. This ‘globalisation’ of the production and consumption of goods and some services has had a wide range of impacts.
Global wealth has increased significantly and unevenly; inflation has fallen and outsourcing has enabled lower production costs for many goods and services.
Many investors, conscious of the risks posed by political fragmentation and increased protectionism, worry if this trend will continue. While it is unlikely the gains of the past will be quickly reversed, the future pace of change may be significantly slower.
The current trade war between China and the USA illustrates the potential problems.
In 1990, China was the twelfth largest economy in the world, less that a sixteenth the size of the largest world economy [USA] with an annual average income of US$315. By 2018, the Chinese economy has grown 30 times larger, lifting more than 700 million people out of poverty. This phenomenal growth for such a large country was bound to cause friction.
In 2017/18, the US mood towards China changed significantly, with increases in trade tariffs on goods. The investment implications of increased tariffs will continue for 2019 and beyond. Investors are asking, how they can balance the risks of investing in China with the growth opportunities investment in China still offers.
If global trade reverses direction, we may see greater divergence between investment returns in different countries and regions. The current view of analysts that ‘global stocks are best’ will be challenged in this scenario. Investors, seeking above average returns, will need to carefully balance how their portfolios might best be exposed to growth in China and the East in general with the risks to those portfolios that are currently very challenging to assess.
An environment of global economic divergence will have a knock-on effect with currency markets becoming more volatile, thus causing asset managers to review how currency risks within portfolios will be managed.