The Long Term Impact of Trade Wars on Investment Returns

5 June 2019

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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.

Executive summary

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 returns.

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.

Long Term Impact of Trade Wars pdf cover

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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