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It seems a long time ago that world markets were riding high on a wall of new money created by central banks, sustained by enthusiasm for the efficiencies and advantages of global trade.
Many bulls in markets reasoned that we were in a golden era, where countries and companies would specialise at what they were best at, and countries would remove more of the remaining barriers to allow free and fair trade between the five continents.
New fleets of huge container ships, new deep water ports and large-scale plants sprang up to make the global trade vision more of a reality. China became the factory of the world while the US was the champion of the internet, data and social media.
Now everything seems to have changed. Donald Trump, the former US president, was the first to mount a serious challenge by pointing out that China did not play by the rules when it came to respecting intellectual property and granting fair access to its own market. He raised doubts by stressing the need for the advanced democracies to keep sufficient control of the essentials for survival and for defence.
Then the Covid pandemic ripped apart supply chains and closed factories that people relied on for just-in-time deliveries; airliners were parked given the restrictions on travel.
This year, Russia’s unprovoked invasion of Ukraine has led democracies to reappraise their dependence on Russian oil and gas as they worry about their purchases financing the war. President Joe Biden now leads demands for moral and political issues to shape the pattern of trade.
For some time I have been examining the consequences of the pursuit of greater national and regional economic self reliance. The US has “Made in America”, the EU is auditing its digital and resource needs, and China has long followed an economic model where it secures many of its essential supplies from home production or friendly sources.
Overall world output and efficiency will drop compared with a pure free trade model, but there will be new winners as some countries and regions succeed in building new capabilities to replace imports.
This major shift in strategic aims underpins the world outlook as markets seek to adjust to three major sets of changes. The digitalisation movement races on, accelerated by lockdowns. Today, more countries wish to regulate the leading tech companies and ensure they have sufficient access to the winning technologies of the digital revolution.
There is also a rush into providing more microprocessor production capacity in a world short of electronic chips. The green revolution seeks to replace hydrocarbons as a prime source of energy against a background of countries wishing to remove Russia from their oil and gas purchases. The environmental, social and governance (ESG) investment movement wishes to reward companies which behave well, while some leading countries are now behaving badly, posing new moral and investment dilemmas for portfolio managers.
Russia warns investors that there are risks in ignoring bad governance and a disregard for the rules of international conduct at the country level, as well as at the company share level in a portfolio.
Maybe ESG should apply to states as well as businesses. Russia always looked cheap and was likely to make more money out of rising oil prices as the world recovery got under way, but it was easy to say no to such an investment given the obvious shortcomings of the government. That is what we did with this portfolio.
Memories of South Ossetia, Syria and Crimea should have been fresh in investors’ minds before buying Russian stocks. I sold out of China in this portfolio when I saw the lurch in government towards an autocracy led by President Xi Jinping. While there may be moneymaking opportunities in the world’s second-largest economy, it is difficult to trust a state which is imposing new controls on its private property sector, rounding on successful entrepreneurs, and has clear aims to rearm and to advance its territorial reach and influence.
The world is moving to shape itself into two major blocs. The Chinese bloc will include a Russia dependent on Chinese support and goodwill. It will stride on to create its own digital and internet architecture, it will spend a lot on weapons, and will reach out to as many non-aligned countries as possible along the Asia to Europe Belt and Road, and in the ring of islands between China and Australia. The US-led bloc will include Europe, the Five Eyes security grouping and parts of Central America.
Both blocs will court India, Brazil, and parts of Africa. The EU will seek to differentiate itself from some features of US policy but will remain reliant on Nato for its defence and will continue to need plenty of US technology in the digital, military and communications sectors.
Inflation remains an urgent challenge in many advanced countries, with price rises hitting an alarming 9.8 per cent last month in Spain and trending considerably higher in the rest of Europe.
The tough choice that still confronts central banks is how to curb inflation while not slowing economic growth too much.
So far this year share and bond markets have fallen, mainly in response to the predictable surge in inflation on both sides of the Atlantic. The economic misery has been compounded by the bad news of the Russian war in Ukraine. The fund is down 4 per cent this year, thanks to the falls in holdings of world equities and in the specialist indices in both green and digital global technology.
After a good couple of years’ performance, these potential winners have also been hit by the move to higher interest rates and the uncertainties from supply disruptions. The fund’s fall has been limited by holding a quarter in inflation-linked bonds to provide some inflation protection and a quarter in cash which has the advantage of not going down in falling markets.
In due course the bond market will bottom out when people think the main central banks have raised rates enough and have the mastery of inflation. That will be the time to put more of the cash to work.
Sir John Redwood is chief global strategist for Charles Stanley. The FT Fund is a dummy portfolio intended to demonstrate how investors can use a wide range of ETFs to gain exposure to global stock markets while keeping down the costs of investing. john.redwood@ft.com
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