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Insights

Economic nationalism will present a constant challenge for investors

Gary Smith
Gary Smith
Client Portfolio Manager, Fixed Income

Key Takeaways

  • A decade ago there was little sight of the seismic changes that have since occurred; similarly, events that might be impossible to imagine today will undoubtedly jolt financial markets in coming years
  • In particular, we believe geopolitics will dominate the investment landscape, with increased tariff and sanction regimes affecting trade
  • As a result of this, market volatility will argue for nimble active portfolio management as the best way to navigate potential headwinds

“Sometimes I’ve believed six impossible things before breakfast”

To prepare a presentation on what has changed for long-term investors during the past decade I dug out my notes from 2014. The results were sobering.

In October 2014, macroeconomic factors were at the forefront of investor concerns. The International Monetary Fund (IMF) had forecast global GDP growth at 3.3% in 2014, following 3.3% in 2013. Not exactly exciting stuff.

In 2014 a key consideration for investors revolved around the ongoing decline in US Treasury yields (the five-year note was around 1.5% in October of that year). For Central Bank FX reserves managers this led to a discussion on how best to diversify into higher yielding fixed income such as investment grade credit, public equites, and new currencies such as the renminbi.

By contrast, the primary discussion at conferences this year has been the geopolitical situation, or what has been labelled Cold War 2. The change in the political temperature has triggered military action, political pacts, economic nationalism, sanctions and tariffs.

Adam Smith’s policy objective of maximising the “Wealth of Nations”1 is being swapped for one that maximises the “Security of Nations”. Increasingly rival nations prefer to avoid the risks and forgo the benefits of free trade.

Trade patterns have changed. China has tightened its rules on the imported food to encourage domestic production and achieve food security, while in the US the Biden administration is offering incentives to Taiwan to manufacture chips in America. Profit maximisation and efficient use of capital are no longer the paramount drivers of economic investment.

In 2014 we did not appreciate just how pivotal the year would be for geopolitics. In a cynical move just a few days after the closing ceremony of the Sochi Winter Olympics in the February, Vladimir Putin began his grab for Crimea. Annexation followed in March.

Surprisingly, the IMF world economic outlook in October 2014 did not directly address this annexation, but it did mention heighted tensions between Russia and Ukraine. Hindsight is wonderful, but this is a reminder that although we may see the train in the distance, we don’t always appreciate its size until it hits us.

Sanctions regimes were slowly mobilised after Crimea was annexed, and the election of Trump in 2016 facilitated a snowball effect of tariffs and counter tariffs (Figure 1).

Figure 1: The global backdrop – trade restrictions have risen sharply
Figure 1 The global backdrop - trade restrictions have risen sharply

Source: Global Trade Alert. *2024 extrapolated from September 2024 data

How do we break the spiral?

We observe that the biggest drivers of financial markets in the past decade have been the impossible things that have overwhelmed our carefully considered medium-term quarterly economic forecasts. In 2014, the Queen of Hearts might have considered the following six events as almost impossible to imagine:

The most significant was the Covid-19 pandemic, a global health crisis that was predicted by nobody as it approached us – even though we know pandemics occur. Forecasting that an active volcano will erupt is easy. But forecasting the timing of the next “big one” is difficult – and Covid was big, being responsible for around 15 million deaths worldwide. For comparison, SARS in 2002/03 was responsible for around 1,000 deaths. Pandemic fiscal policy responses in 2020 were massive and created multiple economic distortions which have not been fully unwound. We now have public deficit and debt numbers that were previously unimaginable. Governments have shown an unwillingness to grasp that nettle, but will markets eventually force them to do so?

Russia’s invasion of Ukraine in 2022 triggered the most devastating war in Europe since the Second World War. Historians may point to the sanguine acceptance of the 2014 annexation of Crimea by the west, typified by IMF commentary, as encouraging later belligerence. The all-out invasion of Ukraine led to sanctions, disrupted supply lines and rapid increases in the price of gas and oil that boosted already increasing inflation rates. Most nations saw a 40-year-high headline CPI print. The war also dislocated and reshaped trade flows in unimaginable ways. Russian oil was banned from the EU but welcome in India, which now takes most of the oil that used to be exported to the EU. India pays for a lot of it in UAE dirhams. Who would’ve predicted this?

Third on the list of impossible things would be a TV personality winning the presidency of the United States in 2016 and becoming the leading contender to do so again in 2024. In 2014 the name of Donald Trump did not feature highly on a list of likely presidential candidates. In a world of frosty relations with China, Trump was a willing actor when it came to taking the trade war to China and agreeing a policy of tariffs and sanctions. The portents are for more of the same in 2025 if he wins the election in November.

Next on the list would be President Xi of China engineering a job for life in 2018. Securing his domestic political situation might have encouraged Xi’s appetite for foreign policy adventure. The rollout of the Belt and Road Initiative began in 2013 when it was announced as a trade policy. Over the past decade it has taken on the appearance of an increasingly strategic geopolitical project. Trade and military alliances go together.

The crisis in the Middle East will not have surprised many, but the Hamas incursion into Israel in late 2023 surprised everyone. That was the trigger for the current extreme tension between Israel and Iran. At the time of writing it is not clear how rapidly and broadly this conflict may accelerate, and just how big the human price and economic consequence may turn out to be. The axis of ill-will is a phrase used by the historian Niall Ferguson to describe the alliance between Russia, China, Iran and North Korea.2 Evidence of their increased cooperation and deepening relationship is evident in the exploded materiel on the battlefields of Ukraine. In which military theatres of operation might this axis operate next? Will a confrontation with NATO be inevitable?

Finally, don’t overlook Brexit. A local story, but one that opened the sores of populist and nationalist sentiment that have been bubbling in the UK for many years. View the UK as a petri dish experiment because other western nations have similar undercurrents that could come to the fore and complicate investing. Although the idea of a referendum was introduced in 2013 by David Cameron, the hard Brexit that was eventually delivered in 2020 required several things to happen. Firstly, the Conservative Party needed to win an election in 2015 in which they lagged in the polls; second, the UK had to vote “leave” in the subsequent 2016 referendum, a result which confounded pollsters; and finally the Conservatives needed to deliver a hard version of Brexit that for years was not viewed as likely.

Boris Johnson, a key player in the story and the prime minister who finally “delivered” Brexit, has claimed the development and delivery of Covid vaccines as the best example of the success of Brexit. It is disappointing that a policy of ring-fencing lifesaving drugs and an explicit “my country first” philosophy is today being celebrated as a policy success.

The economic nationalism that ties all these events together has consequences. “Just in case” replacing “just in time” in global supply chains has implications for trade patterns and the price of goods. It will often mean paying more to ensure greater security of supply (ie a higher floor for CPI in future cycles).

For FX reserves managers, who let’s not forget are government institutions, it may also have implications for constructing portfolios – ie building your friends into the asset allocation for what is effectively a national wealth portfolio, and perhaps having to choose which political bloc you want to belong to (for example, towards the US or, for some, towards China).

What about the next 10 years?

Events that might today be impossible to imagine will come to be a feature and will jolt financial market volatility when they occur.

It’s perhaps advisable to think the impossible. There will always be astonishing stories in equity space (for example, Nvidia), but events in fixed income can also be extraordinary. Who would have forecast that over a period of 10 years the Chinese five-year government bond versus the US five-year would swing from +200bps to -200bps?

We can’t forecast unknown unknowns, but we can highlight known unknowns. In 10 years from now Iran’s supreme leader, Ali Hosseini Khamenei, will be 95, Putin will be 81 and Xi will be 82. Although North Korea leader, Kim Jong Un, will only be around 50, his health status is not clear. We predict that regime change in any or all of these countries is coming, but we don’t know what it will look like. Succession planning is not transparent. This will be difficult for financial markets to price accurately and suggests that we will continue to see bouts of amplified volatility.

When will the rubber band on fiscal policy – stretched like never before in 80 years – finally break? Led by the US, fiscal laxness argues for a higher floor for long rates in the longer dated future, ie at the end of the current Fed-inspired bond yield cycle. Will bond investors refuse to buy, or will a first mover on fiscal consolidation enjoy a market response that eventually forces others to follow?

Economic nationalism looks as though it is baked in. As we saw in the 1930s, tariffs and sanctions tend to lead to tit-for-tat responses, and a vicious spiral. It is very difficult to see how this problem can de defused and it will likely be an important theme for the next decade. The question is how best to incorporate the theme into investment strategies.

In 2024 we are in a much more complicated world than in 2014. We should take a page from the Queen of Hearts and try and imagine another six impossible things for the next decade.

The argument is for a nimble approach to portfolio management. Periods of heightened market volatility will be an environment in which active management should beat passive. Investors should make their investible universe as wide as possible, utilise as many investment tools as their guidelines allow, and work with investment managers that have a strong track record.

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Economic nationalism will present a constant challenge for investors

1 Adam Smith Institute, Wealth of Nations
2 Bloomberg, Bipartisanship is dead. Except on China, 13 November 2022

Important information:

For use by professional clients and/or equivalent investor types in your jurisdiction (not to be used with or passed on to retail clients). For marketing purposes.
This document is intended for informational purposes only and should not be considered representative of any particular investment. This should not be considered an offer or solicitation to buy or sell any securities or other financial instruments, or to provide investment advice or services. Investing involves risk including the risk of loss of principal. Your capital is at risk. Market risk may affect a single issuer, sector of the economy, industry or the market as a whole. The value of investments is not guaranteed, and therefore an investor may not get back the amount invested. International investing involves certain risks and volatility due to potential political, economic or currency fluctuations and different financial and accounting standards. The securities included herein are for illustrative purposes only, subject to change and should not be construed as a recommendation to buy or sell. Securities discussed may or may not prove profitable. The views expressed are as of the date given, may change as market or other conditions change and may differ from views expressed by other Columbia Threadneedle Investments (Columbia Threadneedle) associates or affiliates. Actual investments or investment decisions made by Columbia Threadneedle and its affiliates, whether for its own account or on behalf of clients, may not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not take into consideration individual investor circumstances. Investment decisions should always be made based on an investor’s specific financial needs, objectives, goals, time horizon and risk tolerance. Asset classes described may not be suitable for all investors. Past performance does not guarantee future results, and no forecast should be considered a guarantee either. Information and opinions provided by third parties have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed. This document and its contents have not been reviewed by any regulatory authority.
In Australia: Issued by Threadneedle Investments Singapore (Pte.) Limited [“TIS”], ARBN 600 027 414. TIS is exempt from the requirement to hold an Australian financial services licence under the Corporations Act 2001 (Cth) and relies on Class Order 03/1102 in respect of the financial services it provides to wholesale clients in Australia. This document should only be distributed in Australia to “wholesale clients” as defined in Section 761G of the Corporations Act. TIS is regulated in Singapore (Registration number: 201101559W) by the Monetary Authority of Singapore under the Securities and Futures Act (Chapter 289), which differ from Australian laws.
In Singapore: Issued by Threadneedle Investments Singapore (Pte.) Limited, 3 Killiney Road, #07-07, Winsland House 1, Singapore 239519, which is regulated in Singapore by the Monetary Authority of Singapore under the Securities and Futures Act (Chapter 289). Registration number: 201101559W. This advertisement has not been reviewed by the Monetary Authority of Singapore.
In Hong Kong: Issued by Threadneedle Portfolio Services Hong Kong Limited 天利投資管理香港有限公司. Unit 3004, Two Exchange Square, 8 Connaught Place, Hong Kong, which is licensed by the Securities and Futures Commission (“SFC”) to conduct Type 1 regulated activities (CE:AQA779). Registered in Hong Kong under the Companies Ordinance (Chapter 622), No. 1173058.
In Japan: Issued by Columbia Threadneedle Investments Japan Co., Ltd. Financial Instruments Business Operator, The Director-General of Kanto Local Finance Bureau (FIBO) No.3281, and a member of Japan Investment Advisers Association and Type II Financial Instruments Firms Association.
In the UK: Issued by Threadneedle Asset Management Limited, No. 573204 and/or Columbia Threadneedle Management Limited, No. 517895, both registered in England and Wales and authorised and regulated in the UK by the Financial Conduct Authority.
In the EEA: Issued by Threadneedle Management Luxembourg S.A., registered with the Registre de Commerce et des Sociétés (Luxembourg), No. B 110242 and/or Columbia Threadneedle Netherlands B.V., regulated by the Dutch Authority for the Financial Markets (AFM), registered No. 08068841.
In Switzerland: Issued by Threadneedle Portfolio Services AG, Registered address: Claridenstrasse 41, 8002 Zurich, Switzerland.
In the Middle East: This document is distributed by Columbia Threadneedle Investments (ME) Limited, which is regulated by the Dubai Financial Services Authority (DFSA). The information in this document is not intended as financial advice and is only intended for persons with appropriate investment knowledge who meet the regulatory criteria to be classified as a Professional Client or Market Counterparty and no other person should act upon it. This document and its contents and any other information or opinions subsequently supplied or given to you are strictly confidential and for the sole use of those attending the presentation. It may not be reproduced in any form or passed on to any third party without the express written permission of CTIME. By accepting delivery of this presentation, you agree that it is not to be copied or reproduced in whole or in part and that you will not disclose its contents to any other person.
This document may be made available to you by an affiliated company which is part of the Columbia Threadneedle Investments group of companies: Columbia Threadneedle Management Limited in the UK; Columbia Threadneedle Netherlands B.V., regulated by the Dutch Authority for the Financial Markets (AFM), registered No. 08068841.
Columbia Threadneedle Investments is the global brand name of the Columbia and Threadneedle group of companies.

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Important information:

For use by professional clients and/or equivalent investor types in your jurisdiction (not to be used with or passed on to retail clients). For marketing purposes.
This document is intended for informational purposes only and should not be considered representative of any particular investment. This should not be considered an offer or solicitation to buy or sell any securities or other financial instruments, or to provide investment advice or services. Investing involves risk including the risk of loss of principal. Your capital is at risk. Market risk may affect a single issuer, sector of the economy, industry or the market as a whole. The value of investments is not guaranteed, and therefore an investor may not get back the amount invested. International investing involves certain risks and volatility due to potential political, economic or currency fluctuations and different financial and accounting standards. The securities included herein are for illustrative purposes only, subject to change and should not be construed as a recommendation to buy or sell. Securities discussed may or may not prove profitable. The views expressed are as of the date given, may change as market or other conditions change and may differ from views expressed by other Columbia Threadneedle Investments (Columbia Threadneedle) associates or affiliates. Actual investments or investment decisions made by Columbia Threadneedle and its affiliates, whether for its own account or on behalf of clients, may not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not take into consideration individual investor circumstances. Investment decisions should always be made based on an investor’s specific financial needs, objectives, goals, time horizon and risk tolerance. Asset classes described may not be suitable for all investors. Past performance does not guarantee future results, and no forecast should be considered a guarantee either. Information and opinions provided by third parties have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed. This document and its contents have not been reviewed by any regulatory authority.
In Australia: Issued by Threadneedle Investments Singapore (Pte.) Limited [“TIS”], ARBN 600 027 414. TIS is exempt from the requirement to hold an Australian financial services licence under the Corporations Act 2001 (Cth) and relies on Class Order 03/1102 in respect of the financial services it provides to wholesale clients in Australia. This document should only be distributed in Australia to “wholesale clients” as defined in Section 761G of the Corporations Act. TIS is regulated in Singapore (Registration number: 201101559W) by the Monetary Authority of Singapore under the Securities and Futures Act (Chapter 289), which differ from Australian laws.
In Singapore: Issued by Threadneedle Investments Singapore (Pte.) Limited, 3 Killiney Road, #07-07, Winsland House 1, Singapore 239519, which is regulated in Singapore by the Monetary Authority of Singapore under the Securities and Futures Act (Chapter 289). Registration number: 201101559W. This advertisement has not been reviewed by the Monetary Authority of Singapore.
In Hong Kong: Issued by Threadneedle Portfolio Services Hong Kong Limited 天利投資管理香港有限公司. Unit 3004, Two Exchange Square, 8 Connaught Place, Hong Kong, which is licensed by the Securities and Futures Commission (“SFC”) to conduct Type 1 regulated activities (CE:AQA779). Registered in Hong Kong under the Companies Ordinance (Chapter 622), No. 1173058.
In Japan: Issued by Columbia Threadneedle Investments Japan Co., Ltd. Financial Instruments Business Operator, The Director-General of Kanto Local Finance Bureau (FIBO) No.3281, and a member of Japan Investment Advisers Association and Type II Financial Instruments Firms Association.
In the UK: Issued by Threadneedle Asset Management Limited, No. 573204 and/or Columbia Threadneedle Management Limited, No. 517895, both registered in England and Wales and authorised and regulated in the UK by the Financial Conduct Authority.
In the EEA: Issued by Threadneedle Management Luxembourg S.A., registered with the Registre de Commerce et des Sociétés (Luxembourg), No. B 110242 and/or Columbia Threadneedle Netherlands B.V., regulated by the Dutch Authority for the Financial Markets (AFM), registered No. 08068841.
In Switzerland: Issued by Threadneedle Portfolio Services AG, Registered address: Claridenstrasse 41, 8002 Zurich, Switzerland.
In the Middle East: This document is distributed by Columbia Threadneedle Investments (ME) Limited, which is regulated by the Dubai Financial Services Authority (DFSA). The information in this document is not intended as financial advice and is only intended for persons with appropriate investment knowledge who meet the regulatory criteria to be classified as a Professional Client or Market Counterparty and no other person should act upon it. This document and its contents and any other information or opinions subsequently supplied or given to you are strictly confidential and for the sole use of those attending the presentation. It may not be reproduced in any form or passed on to any third party without the express written permission of CTIME. By accepting delivery of this presentation, you agree that it is not to be copied or reproduced in whole or in part and that you will not disclose its contents to any other person.
This document may be made available to you by an affiliated company which is part of the Columbia Threadneedle Investments group of companies: Columbia Threadneedle Management Limited in the UK; Columbia Threadneedle Netherlands B.V., regulated by the Dutch Authority for the Financial Markets (AFM), registered No. 08068841.
Columbia Threadneedle Investments is the global brand name of the Columbia and Threadneedle group of companies.

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