Anthony Rayner
Over the last few decades, globalisation saw economies move increasingly in lock step with each other, in terms of economic growth and the trend for subdued inflation. Partly as a result of this, policy became more synchronised too, compounded by a belief in the power of very loose monetary policy and, until more recently, tight fiscal policy, led by a preference for austerity. This policy combination was embraced by many authorities.
The crises too became more global, whether it was the Global Financial Crisis or Covid-19. In the case of the latter, increasingly globalised trade and travel contributed to the speed of transmission across societies.
However, while the response to Covid by authorities has always varied to some degree, more recently there has been an increasing gap between, for example, the “zero-Covid” policy of China and many other societies, who are increasingly “learning to live” with Covid.
This divergence is having an impact on economic growth and monetary policy. The US is growing at a decent clip, inflation is at multi decade highs and monetary policy has taken a sharply hawkish turn. At the same time, the People’s Bank of China is easing monetary policy, due to weaker growth and slowing inflation, in part due to the country’s zero-Covid policy, as well as the troubled property sector. So, the world’s two biggest economies are moving in opposite policy directions.
What does this mean for financial markets? In the few decades before Covid, as monetary policy converged, particularly as policy became more extreme, the performance of many assets converged, including equities and bonds, moving higher over time. As a result, portfolio diversification became less clear cut, even if government bonds frequently bailed out the equity markets in times of turmoil (helped by aggressive policy action).
More recently though, higher US Treasury yields and a more hawkish Fed policy not only signal a divergence from some major economies but also the ending of emergency monetary policy and, indeed, an attempt to normalise policy.
The prevailing dynamic of globalisation is being challenged too, for example, by increased nationalism, more stringent border controls and attempt by the US to contain China economically.
As economies and policy makers start to move more independently, we should expect assets to follow. In January this year, for example, the NASDAQ Index was down materially but the FTSE 100 Index was up. As a general rule, diversity is healthy but it depends on how quickly markets adjust and, crucially, how US Treasuries behave. Assuming markets don’t become too dislocated, this should be a good environment for achieving better portfolio diversification, especially for active, genuinely global, multi asset funds.
