By Shamubeel Eaqub, Chief Economist at Simplicity
We are in what I would consider a hinge moment and living through a major regime change. The peace-driven global order established after the world wars that has defined geopolitics, trade, economics and investing is ending.
The last 80 years of this regime was led and held together by the USA, but it is now walking away from this under the revived Trump administration and also actively undermining the beliefs of closer cooperation and shared prosperity that underpinned it.
So what does this mean for investors? Investment is fundamentally a bet on rising economic prosperity and managing uncertainties. For active investors, this also means betting on specific sectors and/or businesses, which is a tough ask in the face of increasing uncertainty.
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Old grievances
This mentality has not emerged in a vacuum. The last 80 years of increased globalisation has brought many benefits, especially in the education, urbanisation and industrialisation of many poorer nations. It is progress that has lifted billions of people out of poverty and the sheer breadth and scale of increased economic prosperity is unprecedented. But it has come with two key costs.
First, climate change, which is not the focus of this article, but an issue that generations to come will need to grapple with. Second, the same forces that lifted billions out of poverty around the world did not improve inequality and poverty within richer countries. If improving economic standards leave too many people behind, then their grievances against the current economic system are understandable and perhaps justified.
After the second World War, inequality fell sharply with the widespread adoption of the welfare state and remained low until the 1970s. Then the neoliberal reforms of the 1970s and 1980s increased inequality. The hope was that after an initial increase, renewed economic dynamism would reduce inequality, but it just became entrenched.
Much of this inequality had a strange nuance: many things became easier and cheaper (think phones, entertainment and fast food) but many of the basics became more expensive or rationed (housing, health and fresh food). For those less fortunate, this erodes peoples’ satisfaction with life, their trust in each other, their community, and their institutions (like courts, politicians, and democracy). It’s a breakdown of social cohesion.
New Zealand is not immune. While not as polarised as the United States, a recent comparison in the Helen Clark Foundation Social Cohesion report showed we are less cohesive than in Australia. The biggest fracturing is explained by the rich-poor divide, as well as political alliances, ethnicity, and age. The more entrenched inequality and poverty become, the bigger the risks to the foundations of national economic prosperity.
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Events, dear boy, events
The current polarisation in politics around the world can seem sudden but is, in reality, a slow rot that has been spreading for decades. In the United States, political views have been hardening for around two decades and the current tariff wars and attacks on American institutions are a crystallisation of these long running forces. It reflects other expressions of discontent, such as Brexit in 2020 and the rise of the far right in Europe.
For investors, it is about understanding and adapting to immediate investment consequences of policy changes. It’s also a general step shift upwards of uncertainty and risk. This leads to more frequent changes in governments, rapid implementation (and reversal) of unorthodox policies, institutions under duress from government, increasing civil and global conflict, ongoing fiscal pressures and an increase in defence spending.
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Live long and prosper
Capital, labour and technology describe and drive economic growth, but they do not explain why it happens. That’s down to culture, institutions, geography and luck. Luck can’t be managed, but the others can.
Today we are observing a rejection of globalisation that has previously seen closer economic and defence cooperation between countries.
The future need not be bleak, but progress from here is likely to be less predictable, and more uneven.
For our future generation of investors, this matters. The risks that were moderated in the last 80 years will return. Importantly, there may be wild gyrations depending on political climate in and between countries, meaning the need to either be more aware and more nimble, or more disciplined at staying calm and investing with a long-term perspective. That means the critical qualities for investors in this environment will be humility and curiosity.
