Investment Insights: A bump in the road or a U-turn for globalization?

Posted By Wade Balliet In Your Wealth | No Comments

This weekly report presents insights from our Global Investment Management team.

Crowded street scene in India as cars wait for pedestrians crossing the street. [1]We have all felt the impact of globalization in one form or another.

In the 1950s, American-made cars dominated the roads, where today you are more likely to see vehicles from Japan or Germany. Keep in mind, the S&P 500 Index was at 59.89 at the end of 1959 – far lower than the 2,100s level we have seen these days. Another natural example of globalization would be the phrase “Made in China” – how many household products and devices have been made for the world within the borders of that Asian manufacturing powerhouse?

The world has gravitated toward a single system through concepts like competitive advantage and specialization. Whether it’s the craft of blacksmithing versus shepherding or cheaper manufacturing in Asia or Latin America, globalization has been the key theme for people, nations, politics, and markets. It is quite hard not to speak in terms of the “global” economy and “global” financial markets due to the increased integration between countries around the world via technology, trade, communication, government policy, central bank policy, and even culture. With steam gaining from rhetoric based on populism and nationalism, investors are now questioning if globalization has seen a slight setback, or if de-globalization has begun.

The Brexit, the term for Britain exiting the European Union, may have been the first real sign of a possible reversal of the globalization trend. Immigration was one of the most important topics argued during the U.K.’s referendum and continues to be a major geopolitical issue for many countries, especially those in the Eurozone as the refugee crisis spreads across Europe. This is a defining moment in history with already momentous impacts on local populations and policies. In some nations, what used to be considered isolationism is now being patriotically referred to as national independence.

In the U.S., protectionism is also gaining a foothold. Populist voters in the United States have turned to candidates and representatives who have repeatedly and publically denounced immigration, current trade deals, and even focused their crosshairs on exclusion of certain religious and ethnic groups. Additionally, in a poll conducted by Pew Research Center in the spring 2016 Global Attitudes Survey, seven of the 10 nations within the European Union said that they should deal with their own problems and let other countries deal with their own problems as best they can. With the slow, plow horse recovery in many developed markets and the discontent felt by many across the globe, is the scapegoat globalization?

Has the Brexit and the rise of these other ideologies just doomed the interconnectedness of the world? Probably not. Although, globalization does seem to be presently focused in emerging markets rather than the developed world. While U.S. exports have not fully recovered from pre-2008 levels, trade between other countries has expanded. According to the World Trade Organization and Bloomberg, the percent of exports sent from emerging countries to others in the same group was 52%, compared to 38% in 1995. The same data also shows trade between China and India, two of the world’s fastest growing economies, has increased from $1.7 billion in 1997 to $72 billion in 2014. The question should not be whether globalization will continue, but instead how developed countries can get back in the game.

Chart showing data on most recent market returns [2]

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Investing involves risk, including the possible loss of principal and fluctuation in value. Economic and market forecasts reflect subjective judgments and assumptions, and unexpected events may occur. Therefore, there can be no assurance that developments will transpire as forecasted. The information in this newsletter is for informational purposes only and is not intended to be investment advice or a recommendation. Nothing in this newsletter should be interpreted to state or imply that past results are an indication of future performance.

Fixed income securities are subject to interest rate, inflation, credit and default risk. The bond market is volatile. As interest rates rise, bond prices usually fall, and vice versa. The return of principal is not guaranteed, and prices may decline if an issuer fails to make timely payments or its credit strength weakens.

International securities involve additional risks such as currency fluctuations, differing financial accounting standards, and possible political and economic instability. These risks are greater in emerging markets.

Diversification and asset allocation do not ensure a profit or guarantee against loss.


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[1] Image: http://blog.bankofthewest.com/wp-content/uploads/2016/10/emerging_mkt_India_crop.jpg

[2] Image: http://blog.bankofthewest.com/wp-content/uploads/2016/10/chart_GIMWeekly_101216.jpg

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