The world is at an inflection point as the forces of globalization, which have propelled economic progress through trade for decades, are now being unwound. This transition is marked by shifting dynamics in trade relations, characterized by fragmentation and the potential for a great power rivalry between the United States and China. As shown in the charts below, trade openness, defined as the sum of exports and imports as a percentage of GDP has stalled due to the increasing number of trade restrictions that have been imposed globally. Understanding this emerging paradigm is crucial for comprehending the implications it holds for investors seeking to navigate an evolving investment environment.
The Emergence of Geopolitical Power Struggles: Geopolitical power struggles have been making headlines. The relationship between the United States and China is marred by mistrust, security concerns, and disputes involving Taiwan. Middle Eastern countries, such as Saudi Arabia, have started to establish strategic partnerships with China, shifting their perception of the U.S. as their primary ally. Moreover, the BRICS association and the Shanghai Cooperation Organization (SCO) are expanding their memberships and deepening economic ties, thereby increasing their influence on the global stage. Below is a table that displays the pending growth in these international alliances.
These developments reflect a desire among BRICS and SCO countries to establish a "multipolar world," challenging the U.S.-led Western authority that they perceive as outdated. Altogether, the size of BRICS and SCO economies are projected to overtake that of western-aligned economies by as early as 2024 with their lead expected to continue to expand towards 2028.
Investment Opportunities and Risks: Geopolitical power struggles present both risks and opportunities for investors. While these challenges can negatively impact economic growth, markets, and sectors, they also create investment opportunities for astute investors. Many countries are actively pursuing initiatives in technological security, energy security, food security, and health security to align with their national interests. China's focus on sovereign development through economic planning and investments in research and development is noteworthy. Simultaneously, the U.S. and its allies are promoting onshoring of manufacturing and strengthening supply chains among allied countries. As shown below, since the US/China trade war in 2018, the frequency of onshoring being mentioned during corporate earning’s calls has spiked higher.
These initiatives are expected to benefit various industries, including advanced semiconductor technologies, artificial intelligence, cybersecurity, critical minerals and rare earth, energy transition technologies, water resource technologies, select industrial and infrastructure technologies, military and space equipment, biotechnology, and life sciences. However, the resurgence of protectionism still poses challenges. Increased trade barriers, tariffs, and sanctions can result in higher expenses, supply chain friction, and sourcing difficulties for many companies.
Implications for Portfolio Allocations: Given the changing landscape, investors need to reconsider portfolio allocations and adopt a more active approach to asset management. Asset and sector allocations between equities and fixed income can not be set with the assumption that cooperative globalization will persist. Instead, they should be frequently assessed under the lens of trade fragmentation, protectionist risks, and the realignment of relations between nations into formal and informal blocs.
Investors should carefully evaluate country, industry, and company investment exposures. While strategically important industries may benefit from these shifts, sustained protectionist trends could dampen global economic growth and equity performance. It is crucial to strike a balance between seizing investment opportunities and managing the risks associated between trade and protectionism. Speak with your advisor to review how geopolitical tensions may impact your portfolio and how to rebalance when these tensions flare.