A reversal of globalism and a return to nationalism and trade protection may impact the performance of global shares as governments seek to drive more investment into their own countries and economies, a boutique international equity manager has noted.
Talaria Asset Management co-chief investment officer Chad Padowitz recognised the global economy was undergoing “tectonic shifts” that were reversing the trend of globalisation that had been taking place since the early 1990s, driven in part by the United States.
“We had this wonderful dynamic of low inflation and low interest rates with expanding profits and valuations, and from a pure equity market perspective that’s been fantastic,” Padowitz said.
“Now we are in the midst of a fundamental change to the global integration we’ve witnessed in the past three decades.
“Part of the reason for that is a strong belief in the US that it has been on the wrong side of global trade and things are slowly moving the other way and it’s bringing about a higher level of local nationalism as countries are bringing their own interests in-house.”
He pointed out the COVID-19 pandemic had highlighted the dangers of long overseas supply chains and that western domestic manufacturing was not resilient enough, with the shift toward internal focus being accelerated by US policy changes under the Trump administration.
Governments were reshaping the movement of capital by adopting policies that encouraged domestic investment and were designed to reduce the flow of capital to other regions or countries, and this shift required a reassessment of capital, risk and how countries depend on each other, he explained.
According to Padowitz this shift could mark the end of a period of strong asset price increases, where nominal cash-flow growth and the cost of funding moved in ways that increased the value of many assets.
“There is a lot of noise in financial markets today. Beyond the noise there are several significant developments for investors to consider,” he confirmed.
“If we had to identify a single item not to lose sight of it would be this: as the monetary regime transitions, the conditions that underwrote rising valuations across a range of assets are no longer in place.
“Our approach for this new environment is to prioritise resilience.
“This means focusing on short-duration assets, companies with strong balance sheets, exposure to real assets and strong diversification to manage investments in a world characterised by fragmentation and increased uncertainty.”