Vontobel Multi Asset Boutique
Given that the date of this year’s World Economic Forum (WEF) was moved from January to May for pandemic reasons, the Alpine resort Davos greeted the participants with a view of lush meadows instead of snow. The world has moved on quite a bit since the last physical meeting of the world’s decisionmakers in the Swiss Alps two years ago. We have endured several waves of a pandemic that left millions of people dead, and have witnessed the return of large-scale warfare long thought to be impossible in the Europe of today.
Back in 2018, Donald Trump unleashed a global trade war at Davos under his AMERICA FIRST scheme. This year, for obvious reasons, geopolitical tensions and a potential new world order were major topics in various round-table discussions and private talks around the event. While Volodymyr Zelenskiy spoke to the forum from Ukraine’s capital Kiev, neither Joe Biden, Kamala Harris, Xi Jinping, nor Vladimir Putin were present. The American president instead decided to go on a trip to Asia where he gathered 12 countries to join a new economic bloc under his nation’s leadership to counter China’s influence.
While things don’t seem to change much at Davos, they do, and at a fast pace, on capital markets. After hitting a record close on January 3 this year, the S&P500 equity index is now officially skirting around bear-market territory, defined as a retracement of 20%. While the Chinese government is trying to handle the health crisis without losing face, it seems increasingly clear that global markets won’t be able to recover unless China changes its zero-tolerance stance on Covid-19.
We are left with a gnawing sense that neither Covid-19 nor inflation were ever particularly “transient”. Could it be that central banks miscalculated the relatively new push towards “deglobalization” and its potentially lasting upward effect on consumer prices? Has the war in the Ukraine made it clear to us that switching from gas to renewables will come at an economic cost? What if the productivity gains tied to globalization many countries have achieved over the past three decades are now quickly undone? This could indeed lead to a deep and protracted global recession.
The world order we have long regarded as a given seems shaky these days. We firmly believe, however, that neither the current geopolitical tensions, the health crisis, nor the global push towards environmental, social and governance-based objectives will undo globalization. Our economies as well as financial markets are inextricably linked, and capital flows in all directions. After Japan, China is the largest holder of US debt, while western companies are heavily invested in China. At the same time, the world’s most populous country is a net importer of food and agricultural products. China won’t go back to an agricultural economy, nor will US companies want to forgo the potential profits in this huge market. All told, we believe globalization is here to stay, which is also what we predicted in our “Harder – better – tougher – greener” Investment Outlook publication in January.