The long-term impact of trade wars on investment returns
5 June 2019
The inescapable conclusion is that the world is moving inexorably towards another extended period of political and economic divergence, with some similarities to the original Cold War, but in many ways more invasive and more dangerous for investors.
The US and China are embroiled in an explicit trade war, but at the
same time an underlying technology-driven cold war. Capital market
investors have clear views of the short-term implications, allowing for
straightforward decision making on that time frame. However, the
longer-term impacts are less visible and the degree to which value
chains and decision-making processes are permanently disfigured
appears to be underappreciated.
The inescapable conclusion is that the world is moving inexorably towards another extended
period of political and economic divergence, with some similarities
to the original Cold War, but in many ways more invasive and more
dangerous for investors. The unintended consequence will be a
three-track world, with a generalised return to heightened state
intervention. Ultimately, this could lead to three distinct ‘camps’ (US-led, China-led and the ‘Old World Order’) of increasing economic
and political interdependency and limiting investment outcomes.
This approach will likely result in an acceleration of the adoption
of certain new technologies, but at a higher risk of permanent
dislocation of trade routes and long-lasting prejudice to investment
In this scenario, the fragmentation of the world into three main
camps will become entrenched. As a result, inflation and interest
rates will rise, fuelling inequality. Consequently, state intervention will
increase as populations become more vocal about their deteriorating
living standards. Investors may not be able to maintain their current
freewheeling status, as first public-sector plans and then large
corporate asset owners could find themselves being channelled into
restricting investment exposure to markets in the ‘other’ camps.
In this article, Kim Catechis, outlines a future economic and political landscape shaped by trade wars, examining the winners and losers, as well as the impact for investors.
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