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After a lengthy period in which the fortunes of individual countries were broadly synchronised, the pandemic has created real differences in the prospects for individual countries. Shifting monetary policy, deglobalisation and shorter supply chains are changing the landscape. This is good news for investors, with global investing now holding greater potential for diversification and access to new sources of growth.
For several decades, the world has been moving inexorably closer. Companies have moved supply chains to the cheapest location, creating inter- dependence between nations. Geopolitics were, as far as is ever possible, benign. While China and the US would exchange tough words, it had little impact on the flow of goods and technology between the two countries.
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This world was already changing prior to the pandemic. Tensions between the US and China had begun to rise under the Trump administration, as US policymakers increasingly recognised that the trade deficit between the two countries was unsustainable. For its part, China had started to move to a model of growth that didn’t rely on the US consumer buying cheap goods, but was more self-reliant.
Pandemic: a permanent change
However, the pandemic has accelerated the diverging fortunes of individual countries. The IMF says that the economic impact of Covid-19 has varied depending on the “susceptibility of the population, the severity of mobility restrictions, the expected impact of infections on labour supply, and the importance of contact- intensive sectors”. The access to the vaccine, distribution and uptake has also been vitally important in how quickly economies have recovered. The IMF warns that the vaccine divide and variations in fiscal policy will make for hugely uneven outcomes in the years ahead. (1)
The pandemic has also seen a sea- change in international relations. It has brought about domestic tensions that have put policymakers under increasing pressure. It has changed labour relations, with shortages becoming commonplace and wages rising. It has been difficult to make goods, because of manufacturing interruptions, and then to get those goods across borders. Companies with long and complex supply chains have been hit hard and businesses have had to re-think their existing sourcing models. This is shifting the relationships between nations.
The pandemic has created other fissures. The inflationary pressures that have emerged in the wake of the crisis have had vastly different impacts on individual countries. This may depend on whether they are a commodity importer or exporter, how they source their energy, or the make-up of their economy.
This has influenced monetary policy. Developed markets – particularly the Eurozone - have been able to take a ‘wait and see’ response on inflation, while emerging markets have been pushed into a sharp increase in rates. Brazil, for example, has been forced to hike rates from 2% in January to 9.25% in December (2) as inflationary pressures have hit. This means these countries are further ahead in their monetary policy cycle and may see interest rates peak far sooner. China has already started to loosen its policy to stimulate its economy.
Innovation
Another argument for looking globally is that innovation is emerging in new places. In China, for example, the government has committed to increasing its research and development (R&D) investment by 7% each year, leading to interesting developments in key areas such as artificial intelligence, biotechnology, quantum computing, and robotics. (3)
India has seen a number of exciting new companies come to market in 2021. Dealogic reports that $15 billion was raised in Mumbai through initial public offerings, of which around 40% went to tech companies. (4)
For investors, it is not enough to focus on Silicon Valley when searching for the next innovative company.
What does this mean for investors?
This global dispersion should ultimately offer more opportunities for investors. The world had become increasingly correlated, making it harder to achieve true diversification by investing across borders. However, as the economic fortunes of different countries fracture, that diversification is easier to achieve. This is important both for capital growth and for income.
Finding these opportunities is not straightforward. Every country comes with its own idiosyncrasies. It takes a presence on the ground in individual regions to understand the strengths and weaknesses in each area and uncover the unique companies in each market. At BlackRock, our investment trust managers can call on analyst teams in every region across the world. We believe this gives us meaningful insight and helps our investors tap into some of the most exciting companies around the world.
Financial markets are entering a more complex time as the world emerges from the pandemic, inflationary pressures mount and the interest rate cycle starts to turn. Investors will need to cast their net widely for opportunities and draw from across the globe for diversification and innovation.
For more information on BlackRock’s range of investment trusts, please visit blackrock.com/its
(1) The Economist, October 2021
(2) Reuters, December 2021
(3) CNBC, March 2021
(4) CNN Business, December 2021
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