This week’s chart shows the history of global trades as a percentage of gross domestic product (GDP). In the last few years, global trade has stagnated. Now, with political populism gaining ground in major countries, it is likely globalization has peaked at this cycle, which will effect asset pricing and the broader economy.
First of all, in a globalized world, labor competes within a global labor pool. This creates wage pressure for employees in developed countries. The wage pressure has been stagnant in developed countries in the last 20 years. One main reason is that labor has to compete with the labor supply from emerging markets. If globalization reverses, this can benefit wage growth, as well as workers. Consumers however, will have to pay more for goods and services - a reversal of the trend seen throughout the last 20 years.
Secondly, globalization causes trade imbalances, which can actually ease financial conditions in developed markets. Why?
The trade surplus accumulated by exporters needs to be recycled back to importers through the capital account. Usually the surplus ends up invested back in U.S. treasuries, which lowers the yield for treasuries. The process works very much like quantitative easing (QE) except QE is done by domestic central banks, and this trade surplus-oriented QE is done by foreign central banks.
With globalization reversing, the trade imbalance could shrink, which means there will be fewer U.S. dollars in emerging markets and fewer dollars to buy treasuries. This could lead to higher dollar funding and higher treasury yields.
Additionally, even though globalization is good for the global economy, the benefit is not evenly distributed. In the last 20 years, growth in emerging markets benefited by about 0.8% a year from globalization, while growth in developed markets only benefited by 0.2% a year. This uneven distribution of benefits is one of the causes for the current political populism and anti-globalization sentiment. For more signs of populism, I will watch the French presidential election in April 2017.
So, if the world continues to experience less integration and more political populism, the treasury yield should move higher because of higher inflation and less demand from foreign buyers. The impact on risk assets is less clear. So far this year, after “Brexit” and the presidential election, the risk market rallied sharply. I am less sanguine.Key Takeaway:
Political populism and anti-globalization are inflationary, and will likely move interest rates higher. For individual investors that are overweight dividend paying stocks, this higher rate environment can be risky because dividends will be less valued.
The material provided here is for informational use only. The views expressed are those of the author, and do not necessarily reflect the views of Penn Mutual Asset Management.
This material is for informational use only. The views expressed are those of the author, and do not necessarily reflect the views of Penn Mutual Asset Management. This material is not intended to be relied upon as a forecast, research or investment advice, and it is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy.
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