What impact will de-globalization have on the markets? The Multi Asset Team at BNP Paribas is looking into this question and explaining the investment opportunities.
12.10.2018 | 09:45 Uhr
Over the past
30-40 years, globalisation has been accelerated by the use of information
technology (IT). This process is going in reverse as those who did not benefit
from it are pushing for change along various dimensions including trade, immigration
and wealth distribution.
is already in full swing, but it will likely face periods of stress and relief
as the demands for change hit the speedbumps of institutional barriers such as
international organisations, political pressure, and even financial markets.
struggle between the US and China is one of various consequences of
de-globalisation and currently, it has taken the form of a trade conflict. The
US-China row goes beyond President Trump, as there is wider recognition within
the US that China could pose a threat to US hegemony.
estimate that the US-China tariff row will lead to moderately weaker growth and
higher inflation. The trade conflict is not clearly visible in the global trade
data so far. But it eventually will. We estimate that the damage to the asset
prices of open economies could well surpass the loses we have seen
So far, markets
appear to be penalising the risky assets of open economies based on the view
that a prolonged trade row will hit trade and economic growth, notably in
China. Indeed, we find little evidence that markets are discriminating based on
the potential ‘winners and losers’ of the US China trade war.
Our thesis that
US-China tensions are here to stay means that we are strategically bearish on
the assets that are exposed to them. We favour, for example, being short CNY
vs. JPY and USD. This should work well in the case of a more aggressive
escalation of trade tensions as China would let its currency weaken and JPY and
USD would rally as risk aversion rises.
We are also
cautious on assets that could suffer if China’s manufacturing engine slows
further. Emerging market (EM) equities have generally been hit hard already,
but some developed equity markets that have a large share of foreign revenues
(e.g. UK, Switzerland and even the US) are vulnerable. The currencies of small
exporters such as EM Asia have been resilient so far, but they are vulnerable
to further tensions.
eventually favour the assets of the potential ‘winners’ of de-globalisation
such as the exporters that could fill the China export gap (Mexico, Germany,
etc.) and those sectors exposed to domestic demand such as real estate,
construction, utilities and leisure.
More broadly, the era of expanding globalisation
and ultra-easy monetary policy is coming to an end. This new environment should
bring about higher volatility and greater dispersion in asset returns, which in
turn will offer new investment opportunities.