News & Insights

The end of an era: From globalisation to autarky

04 April 2022, Graham Harrison

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There are decades where nothing happens, and there are weeks where decades happen

Vladimir Ilyich Lenin

Leader of the October Revolution and the first leader and founder of the Soviet Union

That is certainly the way it feels right now. Until recently, the world has been on a multi-decade path of greater integration, both at the geopolitical level and so far as economic activity is concerned. Indeed, since the start of the new millennium, globalisation has gathered momentum and, until Trumpism, Brexit and Covid-19, it was a dominant factor driving financial markets. 

As predicted by Adam Smith, the Scottish economist and philosopher, the pursuit of comparative advantage supported and enhanced the wealth of nations. While there was sometimes vigorous debate around the fair distribution of the benefits of global trade, few doubted that globalisation was a better economic development model than protectionism.

Supply shortages resulting from COVID related lockdowns, followed by the ongoing invasion of Ukraine by Russia, have challenged the idea of globalisation.

Indeed, history may well record 2022 as the turning point when globalisation was replaced by autarky as the dominant mode of thinking. Autarky is the idea of self-sufficiency. Originally expounded by Stoic philosophers such as Seneca, it has latterly come to mean the pursuit of economic independence.

Russia and its allies are being forced into autarky through western sanctions. But at the same time, the priority of liberal nations has turned towards food and energy security. In time the scope will no doubt expand to include raw materials and intellectual property. Looking at the votes cast on the UN resolution inviting nations to deplore Russian aggression in Ukraine provides an idea as to how nations might line up should the world fracture into two competing ideological and economic blocks. Although 141 members voted for the resolution, 40 either abstained or voted against it, including China and India.

Faced with a change in era, how should investors be thinking about investment strategy? Not just what to do today or tomorrow but how to reorientate investment policy to take account of this move from globalisation to autarky. Tactically, all discretionary investment managers and fund managers are currently seeking to protect investor capital as volatile financial markets react to the daily news flow. They are well placed to perform that function and investors should avoid trying to second guess their managers and time exit and re-entry into stocks, sectors and markets. As capital allocators, we are concentrating on the strategic implications of a rapid reversal of globalisation.

We are examining our return and risk assumptions for equity and bond markets both at home and abroad. Strategically, clients should be seeking to open dialogue with their managers and advisers on whether changes in investment policy are necessary or desirable given the prospect of a multiyear reversal of globalisation. Income, total return and risk assumptions for equity and bond markets both at home and abroad may need to be adjusted to reflect a radically changing geopolitical and economic environment.

We collect real-time data from 350,000 client portfolios and more than 120 managers who are responsible for around £1.5trn of assets under management.

In March, our manager sentiment survey showed that they are repositioning. This has been gradual - a year ago sentiment was more pronounced towards emerging markets whereas today in common with the far east and Europe net sentiment is down by around 25%.

However, there is no need for investors to rush into making wholesale changes amid the current uncertainty.

There is however a need to reassess how a new era, or Zeitenwende as it is being described by German Chancellor Olaf Scholz, will change financial risks and rewards for investors. The bad news is that this new era of autarky is likely to bring with it higher inflation, slower economic growth and, on average, lower real returns from both bond and equity markets. The good news is that a reversal in globalisation should deliver significant investment opportunities for actively managed portfolios for investors nimble enough to identify tomorrow's winners today.

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