Investment experts agree there are new sources of economic and political power, but how to profit from the new order is keenly debated.
Thirty-five years ago, an overwhelming election victory for the Solidarity Trade Union led to the collapse of Communism in Poland. Hungary was not far behind and the Berlin Wall was dismantled later that year, leading to the inevitable demise of the Soviet bloc, and the USSR which underpinned it. Political philosopher Francis Fukuyama described the historic revolutionary period of 1989 onwards as the “End of History”, heralding ultimate victory for US-led liberal democracy and market economics.
Today’s investment leaders, responsible for asset allocations of institutions and wealthy families, agree the world has transformed since those heady days, with more sources of economic and political power, and consequent market returns. Profiting from a ‘multi-polar world’ has become a key investment thesis for wealth managers.
A once globalised world is fragmenting around “two economic superpowers” of the US and China, explains Amin Rajan, CEO of the Create-Research consultancy. “The Belt and Road initiative shows how China is extending its geopolitical influence in Asia and Europe by creating a new trading bloc with its own supply chains and renminbi as its main trading currency,” he says. “The US is also reconfiguring its supply chains by redirecting trade with nations in its sphere of influence.”
This has left “ultra-cautious” institutional investors re-focusing portfolios on core, economically powerful regions. “Geopolitical risk has shot up institutional investors’ agendas,” reflects Mr Rajan.
Fund houses hold similar perspectives. “We are in a multipolar world, but the geopolitical dynamic is driven by escalating bilateral rivalry reminiscent of the Cold War,” says Raphael Gallardo, chief economist at €30bn French investment firm Carmignac. A “Nato+” camp under US leadership – including Japan, South Korea, the Philippines, Taiwan and Israel – squares off against an “adversarial camp”, led by China and Russia.
Authoritarian axis
The latter axis has expanded to embrace North Korea, Iran and Venezuela. It is actively courting Hungary, Serbia and Slovakia in Europe, plus countries in sub-Saharan Africa, through growing activities of Moscow’s Wagner militia, now fully integrated into the Russian military.
A third potential economic bloc, loosely known as the “Global South”, is trying to remain neutral in this conflict, believes Mr Gallardo, “taking an opportunistic approach on each specific subject, with notably India adopting a foreign policy theory of multi-alignment”.
Key investment themes around the Nato+ bloc involve re-industrialisation, exploiting natural resources, conventional re-arming and re-shoring supply chains, says Mr Gallardo. “The US have here a key comparative advantage: the international role of the dollar gives them considerable fiscal space to fund industrial policies, despite their poor fiscal sustainability dynamic,” he adds.
The authoritarian axis is more focused on wining the technology race versus the US and finding a way to finance it through internationalisation of the renminbi.
Economic Cold War
Despite this polarisation, the two blocs are essentially “joined at the hip” economically. “Cold War II has a quintessential economic dimension that might regulate this dynamic,” unlike the earlier incarnation, says Mr Gallardo. “Fear of inflation in the West and fear of deflation and unemployment in China regularly temper the willingness of political leaderships to escalate the degree of economic or political pressure on the other camp.”
The ‘re-shoring’ referenced by Carmignac forms a major industry-wide investment theme. Economic shocks caused by the Covid-19 pandemic have led companies and governments to seek more resilient supply chains. “A country cannot produce everything at home, and neighbouring countries may already have high-performing suppliers and a cluster of activity,” says Willem Sels, global chief investment officer for HSBC Private Banking and Wealth.
“So, in addition to re-onshoring, there is a lot of near-shoring and friend-shoring, resulting in stronger regional trade networks, that is taking up some of the decline in very high distance trade and transport.”
These trends have been typified by “very fast growth in trade between Asian nations, which means regions are integrating more quickly”, plus continued growth in Beijing’s trade as China continues to burnish its “manufacturing powerhouse” credentials.
European renaissance
HSBC also points to “strong industrial policy incentives” in the US and China, and increasingly in India and Europe. Whether Europe will experience a resurgence is keenly debated by investment commentators.
“Europe is not doing so badly in reality. French payroll employment is at its highest-ever level in absolute numbers, for instance,” says Edmund Shing, global chief investment officer at BNP Paribas Wealth Management, overseeing more than $440bn for rich individuals and families.
“The challenge is for Europe to promote innovation more, and boost productivity growth, a notoriously slippery measure to target. I expect some recovery in European domestic consumption over the remainder of the year, given low unemployment, robust wage growth above inflation, and high remaining excess savings post-pandemic.”
Create’s Mr Rajan is similarly optimistic. “Europe is finally getting its act together, as shown by its ambitious New Green Deal and support for Ukraine,” he says. “It would be rash to ignore how the European Union has woken up to the economic and military threats it faces.”
But others are not convinced. “Europe is still trying to move beyond post-pandemic priorities, with Germany finding it hard to adapt its business model to a new economic and geopolitical reality,” says César Pérez Ruiz, head of investments at Pictet Wealth Management in Geneva.
“In addition to its exposure to the war in Ukraine and higher energy costs, we believe the main reason for Europe’s chronic economic underperformance versus the US in recent years has been a less supportive fiscal stance.”
Upcoming European parliament elections could further slow the pace of reforms as populist parties gain ground. Moreover, European firms have failed to innovate. “European companies have lagged US peers in competitiveness and adoption of new technologies,” says Mr Pérez Ruiz.
Indian tailwinds
The jury is also split on India’s role in the multipolar investment world, with Pictet’s Mr Pérez Ruiz among the country’s keenest supporters. “As the second-largest emerging economy in Asia, India looks set to maintain strong growth momentum it has enjoyed in recent years,” with Narendra Modi likely to secure a third term as Indian prime minister in the 2024 general election, pointing to policy continuity, he says.
Policy initiatives, including increased infrastructure spending and measures to encourage large-scale manufacturing have started to impact the economy, while rising China-US geopolitical tensions have led multinationals to take India more seriously as an alternative destination for production outsourcing. “These tailwinds mean we continue to believe India’s long-term growth potential is the highest in the region,” affirms Mr Pérez Ruiz.
“India is scaling up and achieving interesting convergences between its industries, AI and services, leading towards new business model standards,” says Didier Duret, strategic adviser to assets from several families managed by Omega Wealth in Geneva.
But Mr Shing at BNP Paribas casts doubt on Indian potential. “Education, the lack of a truly common language and insufficient infrastructure remain substantial potential stumbling blocks on the Indian road to modernisation – very different to many other Asian economies, not just China,” he says.
While a series of government reforms enacted since 2014 have been “unleashing capitalist energies” driving high growth rates, there are fears the country is becoming more autocratic under the BJP.
“India is less of a democracy each day,” says Malik Sarwar, senior partner for wealth management at the Global Leader Group in New York and former senior Asian private banker. “Modi fans the flames of hatred against 200m Muslims, 200m Dalits and 30m Christians That’s a third of the population. India has to decide if it is India for all, or Hindustan for the Hindus.”
Combined with rural and urban poverty, this prejudice against minorities “will hold India back from becoming a global power”, believes Mr Sarwar, although these considerations would not prevent wealthy families from making a quick profit.
“I have not seen rich families mix money making with their geopolitical values,” he says. “They will continue to invest, based on ‘get rich fast’ objectives.” Most investors want to “make a buck and let someone else worry about moral distractions”, although the next generation may be different.
“The one ray of hope is millennials and Gen Z, inheriting more than $70tn, and beginning to apply values to investing. Just don’t hold your breath.”
New world disorder
When it comes to profiting from the “new world disorder”, Omega’s Mr Duret believes investors must move beyond standard “statistical” diversification models, based on historical data and stable correlations between assets, towards ‘fundamental’ diversification, closer to origins of returns. This can be achieved with alternative investments in private markets and access to hedging specialists such as commodity trading advisers (CTAs).
Investing in the newly manifested multipolar world, believe wealth management experts, requires a similar multipolar approach to identifying assets.
