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Globalisation is going into reverse

It finally seems to be dawning on investors that globalisation can no longer be taken for granted.

Donald Trump and Xi Jinping © NICOLAS ASFOURI/AFP/Getty Images

Donald Trump and Xi Jinping: relations between theUS and China have undergone a "fundamental reset"

Markets have been experiencing "a collapse of confidence", says Adam Tooze in The New York Times. The main problem is not the economic backdrop, but a deeper realisation. It seems finally to be dawning on investors that globalisation is "no longer supported by the combination of... economic policy and congenial politics" they once took for granted.

World trade volumes have now shrunk for three consecutive quarters, notes Yasemin Engin of Capital Economics, a consultancy. In August, China's exports to the US declined by 16% year-on-year, while imports from America fell by 22%. This year is set to be the worst for trade since 2009.

The end of an era

Yet "from Washington to Buenos Aires", political commitment to open markets is "disintegrating", says Greg Ip in The Wall Street Journal. Where the US once supported global institutions such as the World Trade Organisation, now it "leads in crippling them". That has left investors and businesses scrambling to rearrange their portfolios and is "pushing the global economy closer to recession".

The ties that bind

Yet even if globalisation is not undone, the new direction of travel is clear. While markets today largely dance to the tune set by Wall Street, decoupling between regions means that future business cycles may become less correlated. That makes geographical diversification more important than ever. Corporate earnings could be another casualty. After years of conquering the world, US companies are now shifting to a "defensive" stance, says Rana Foroohar in the Financial Times. No wonder. As Tooze puts it, the prospect of a world economy divided between a "sclerotic Europe, a nationalist United States and an authoritarian China is a gloomy one". Investors should be prepared.

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