Who’s in charge?

Anthony Rayner
Premier Miton Macro Thematic Multi-Asset Team

It’s not just a question we might ask of the UK political establishment. There is a palpable sense that we are living in an increasingly chaotic world. Long gone are the days when politicians and economies lined up behind the flag of globalisation. Similarly, the US has backed off from its role as global policeman.

That’s not to say that globalisation and US hegemony were universally positive, or negative, just that there was a sense of certainty. Of course, change can be good but, either way, a number of long held assumptions have been thrown out of the window and new dynamics are evident.

Deglobalisation is an increasingly established trend: economic ties are fragmenting; global trade is slowing, and political allies are realigning. There is a notable division within countries too. Take the recent Brazilian election. Not only were neither of the presidential candidates from the political centre ground, but the final results were a wafer-thin split of 51% to 49%. A massive country and economy, even if not a major global financial market. But for a major financial market, turn to the US, and the mid-term elections, where Biden is likely to find legislating more difficult in the next couple of years if either chamber is won by the Republicans. Again, this reflects an increasingly polarised society.

So, there is increased division globally and regionally, look at elevated EU fragmentation risk, as well as within countries. At least in democracies that is, authoritarian regimes are experiencing something different, take China, where Xi recently cemented his grip on power.

Nevertheless, polarising trends have been evident for some time, with recent dynamics adding to the momentum, especially the much higher energy price. It has emboldened energy producers, with many building new alliances, such as Russia, and weakened energy importers, such as the UK, who are feeling added political pressures domestically. Similarly, food insecurity is adding to geopolitical and political pain.

Just as globalisation was deflationary, deglobalisation is contributing to the inflationary environment, with global supply lines disrupted, tariffs increasing and rising labour pricing power. Indeed, the lack of a coordinated response to inflation contrasts notably with the coordinated approach to the Global Financial Crisis, marking a fragmenting diplomatic world where monetary policy will likely become increasingly politicised.

The cost-of-living crisis is crying out for political leadership but high debt levels, divided electorates and a lack of trust in public institutions hamper the ability of governments to act. The related high interest rates are exposing not just zombie companies, but zombie economies and zombie politicians too.

So, who is in charge?
It might be quite clear in countries like China but in Western democracies it isn’t immediately obvious and with politicians struggling to provide answers or legislation, their credibility is fading. Even central banks, who for many were the superheroes of the last few decades, can’t help, Quite the reverse, in the short term they are adding to the cost of living, especially where debt levels are high. Indeed, where economic vulnerabilities and political uncertainty are elevated, it might be that the market takes charge, by selling assets, as they did recently in the UK.

In this new world, portfolio construction should be flexible enough to access returns, to be able and willing to look beyond the 60/40 portfolio model, to a broader universe of assets. For example, this could mean including real assets such as commodities, if inflation is to end up structurally higher in a deglobalising world. Moreover, within assets, just like low rates buoyed the ‘everything rally’, higher rates are increasing the likelihood of winners and losers, so investors will need to be more discerning.

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Risks

Past performance is not a reliable indicator of future returns.

The value of stock market investments will fluctuate, and investors may not get back the original amount invested.

Commodity prices can fall and rise sharply depending on supply and demand, the economic background and financial market conditions. Exposure will never be direct to any commodity.

Forecasts are not reliable indicators of future returns.

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