The momentum toward de-globalisation, set in motion immediately after the pandemic, has been confirmed in 2023. Geopolitical tensions ensure that this trend will persist for the foreseeable future. The conclusion of the ‘risk-free’ world and the disappearance of the ‘peace dividend’ signify a heightened weaponization of the global economy.
Economic policies are now employed defensively, aiming to bolster self-sufficiency in crucial sectors (such as Europe’s focus on energy and the relocation of computer microchip manufacturing away from Taiwan). Simultaneously, these policies are used offensively to diminish competitors’ economic influence, as seen in China’s approach to electric vehicles (EVs).
The surge in protectionism is driven by a significant increase in public debt. In response to this, the US government has taken a proactive stance through the Inflation Reduction Act (IRA), which entails USD 394 billion in tax incentives.
The ongoing restructuring of the global economy is poised to result in widening disparities between nations, notably in their capacity to transition towards greener energy sources. This transformation may lead to economic inefficiencies and a temporary alleviation of higher prices due to escalating government deficits and debt.
However, this very factor may subsequently diminish the preparedness of developed and emerging markets to effectively respond to any future financial or economic shocks.
In 2024, there is a discernible trend indicating that financial assets are poised to progressively incorporate an elevated level of risk within the environment.
My overarching global scenario is built upon three central concepts:
1. A Global Multi-Risk Environment
This encompasses a variety of risks, including climate disasters, economic instability, the inefficacy of multilateral institutions, technological disruptions, supply-chain vulnerabilities, and fluctuating energy prices. This collective risk landscape is anticipated to necessitate a heightened risk premium in financial assets.
2. Sustained Inflation Levels
Contrary to pre-Covid levels, there is an expectation that inflation will persist at higher rates. This sustained inflationary pressure is anticipated to exert continued challenges on economies and monetary policies worldwide.
3. Prolonged Absence of Fiscal Policies for Debt Reduction
Foreseeably, there is a lack of fiscal policies geared towards reducing government debt. This absence implies a continuation of existing debt levels without significant efforts to bring them down soon.
These three key ideas collectively shape the global landscape, indicating the need for a recalibration in financial markets to accommodate the heightened multi-risk environment, sustained inflation, and the prolonged absence of fiscal measures targeting debt reduction.
In summary, my perspective is that financial assets will progressively adapt to the heightened risk environment. This adaptation is influenced not only by the increased risks across various factors but also by the availability of a greater number of investment alternatives offering higher yields.
Market commentary and analysis from Luca Santos, currency analyst ACY Securities
