The Viewpoint: Is the old economic order over?

The initial reaction to ‘Liberation Day’, when the US unveiled its tariffs on other countries it has accused of taking advantage of it, has not been a good one. The scale of tariffs, which reach close to and above 50% for many countries in Asia, is a clear message: the old economic order is over.

Most of our investing careers, and particularly since 2003 when China joined the World Trade Organisation, have been in an environment of globalisation. It no longer mattered where a company sold its final product, it could be manufactured anywhere at the lowest possible cost. Apple and Nike would be examples of US companies which are heavily dependent on manufacturing in China and Vietnam: both countries will now have to pay a heavy tax to import goods into the US.

The immediate consequences of this are likely to be higher inflation and lower growth – a combination which is not a positive one for equity markets. It will reduce the profitability of corporates and put pressure on consumer expenditure as prices increase. This will inevitably take some time to work through for markets, and many companies will need to adjust their profit expectations for the coming year. To focus on this alone is likely to be a mistake, however.

In my view, what we are witnessing is a fundamental re-ordering of the global economy, from which there will be significant investment opportunities. Understanding this re-ordering and the economic framework that will come out from it will be critical. Although it is early days, there are some comments which can be made about this.

It would appear we are moving to a multi-polar world, where three economic regions (North America, Europe and Asia) trade more within themselves than with each other. This suggests investors will have to think about these three regions separately rather than as an interlinked whole. Investing regionally as opposed to globally, even if investing globally, may be a skillset that many investors will have to learn and relearn. Globalisation isn’t completely gone, but it may now matter which markets a company is listed on and operating in, in a way that it hasn’t for some time.

Globalisation isn’t completely gone, but it may now matter which markets a company is listed on and operating in, in a way that it hasn’t for some time.

In the US, there could be an acceleration of the re-shoring trend, which has been ongoing for several years but now must accelerate as companies have to manufacture in the US to access it as a market for selling their goods. Companies providing products and services to build out US manufacturing have been weak recently – and may continue to be in the coming days – due to recession concerns, but they could benefit in the long term from what has occurred.

I believe that Europe will continue to look a more attractive place to invest than it has done in recent years, as it stimulates domestic demand at the same time it becomes politically more cohesive. Better growth and lower risk are a potent combination for equity investors, and although tariffs will hit Europe too, it has created an environment for real change in a positive way.

Asia, led by China, will also form its own economic block. Countries such as China, Japan and South Korea, historically foes, are now coming together to respond to the US. As these and many other Asian countries begin to trade more with each other, it will create new economic linkages and opportunities for companies which operate there.

In summary, what happens in the next few days is less important than what happens in the next few years. The initial reaction will be negative from equity markets and that needs to be respected in decision making. It could however miss the broader point, that economic re-orderings of this scale tend to set the investment trends for years to come, and those investors who can identify them will be well rewarded.

For professional investors only.  This material is not suitable for a retail audience. Capital at risk. This is a financial promotion and is not investment advice. Past performance is not a guide to future performance. The value of investments and any income from them may go down as well as up and is not guaranteed. Investors may not get back the amount invested. Portfolio characteristics and holdings are subject to change without notice. The views expressed are those of the author at the date of publication unless otherwise indicated, which are subject to change, and is not investment advice.