De-globalisation – Feature
be higher than we have been accustomed to, even if inflation moderates from here. This is already altering central bank behaviour. Policy is being tightened even as the growth outlook stalls,” he says. “This has started the process of normalising bond yields. So, there is literally nowhere to hide, as risk and risk-free assets sell off in unison.”
This is already evident in the challenge it poses to investors wanting to achieve the correct balance in their portfolios. Roe also warns of the inflationary picture and the related investment impact. “If de-globalisation were to occur, it would be unambiguously inflationary and likely lead to falls in real incomes, lower average living standards and require much more hawkish central banks. That would cut growth, equity returns, bond returns and potentially lead to a prolonged period of recurring stagflationary and recessionary risks.” Setting out his pension fund’s position, Mason says: “We will still look for quality and value across intercontinental regions. “But, arguably, the risk premium has increased. Whether this is through accounting for more overtly protectionist economic circumstances or reflecting local strategies, including aspects like ESG,” he adds. Roe says the biggest implication for portfolio construction is likely a reduction in confidence that government bonds pro- vide protection in a range of downside scenarios. “To some extent this would be an extension of the current dynamics, but
with a much more structural element,” he says. “We already consider the changing behaviour of bonds within our asset allocation process and we would aim to capture evolving issues like de-globalisation within that framework.”
Lock in gains So, could it mean a huge re-think of asset allocation strategies, given the international nature of many institutional investor portfolios? “Not fundamentally,” says Mason, adding: “We are re-assessing the emerging market growth story in light of geo- political realities.” But Trow believes this could potentially happen. “When bond yields were being depressed by quantitative easing, it left many funds with little alternative but to channel discretionary flows into equities,” he says. “I know of several pension funds that have seriously examined de-risking in recent years, seeking to lock in gains. Invariably though they concluded that bonds were an even bigger bubble than equities and that there was lit- tle choice but to remain overweighted stock.” The deflationary impact of globalisation has been a key feature of the last few decades. “A full blown reversal would have large implications for investors’ future returns and how asset alloca- tors try to construct portfolios,” Roe says. This presents many challenges for investors. “Paradigm shifts can be particularly painful in asset allocation, with previously
The world could be entering a new era, one of de-globalisation. Andrew Holt looks at whether this is truly a new epoch and what it means for investors.
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