It is obvious that the world has become accustomed to globalisation of production. But there is more into it than a globalised production line of goods. During the past 30 years the monetary policy has also been globalised though that might reverse now which will disclose stress in some economies. This will challenge investors and actually also governments.
Around 1980 the Chinese President Deng Xiaoping in small steps opened China’s economy though these steps were enormous steps towards today’s production globalisation.
When the cold war ended in the early 1990’s an additional and very significant increase in the global workforce and production capacity took place. All former Eastern European countries suddenly joined the global production platform. In my view this was the second large step in the globalisation, though the third step has been very different. Where the first two steps fundamentally focussed on moving physical production lines and income then the third step has been digital.
One development is a globalisation of several services that can be handled digital. Much more important is that globalisation has become a reality for each individual person. Everybody now has the option to have an own personalised digital environment that works anywhere in the world. It includes communication, social media profiles, the music that one listens to, the movies to watch etc. The only thing that changes when moving around in the world is the physical environment – some likes it and some not, though I find it fascinating. But generating a globalised world for each individual also means that globalisation cannot be stopped or reversed. The current trade dispute is in my view a discussion about an old fashioned part of the globalisation, about where some production lines should be placed.
As mentioned there has been a monetary globalisation taking place as well during the past decades, but that can in contrary be reversed.
In particular in the 1990’s a development happened when global trade, as a part of the production globalisation, took off. The first step was simply to open up for more cross border capital flows though that alone requires some fiscal discipline for countries to avoid capital flight and / or currency crises.
The second big jump in monetary globalisation was after the financial crisis, for almost 10 years ago, when the large central banks introduced “quantitative easing”.
The financial crisis was simply an expression for an economic unhealthy situation. The correct solution would have been to let bankruptcies correct the economies. It would without any doubt have generated a revamp and brought the production globalisation into a new third stage. Further, many countries would have been forced to introduce significant economic reforms.
This didn’t happen (in particular in Europe) but was counteracted by the quantitative monetary policy as the next step in globalisation.
But at least the American quantitative easing is coming to an end i.e. the global monetary policy is starting to reverse. It can hurt many countries that didn’t conduct the necessary economic reforms during the interim period with abundant liquidity. In the future I expect investors to be much more selective when choosing their preferred investments. The result is limited liquidity for a number of countries which will disclose a weak position for these countries – the coming macroeconomic B countries.
Macroeconomic A countries are those who are fit in one or more ways, where I will pay attention to the following areas:
- Strong private sector growth and / or strong private domestic demand.
- A strong fiscal position.
- A monetary policy that isn’t depended on cheap money from the global monetary quantitative easing.
- Surplus on external balances (like the trade balance)
- Well positioned in the global production and / or service competition.
A distinct development that I expect is even more focus on domestic economic growth in all countries which will require some of the above mentioned macroeconomic strengths. Some growth initiatives could well be classical public investments in infrastructure which not necessarily is healthy. Surely increased public spending will be directed towards health care plus increased transfers of government money to retired people. This indicates that export will lose in importance and therefore are investors forced to invest into domestic growth – preferably in the A countries.
In my view an A country can be an old economy country or an Emerging Markets country, the decisive parameter is how fit the country is.
The biggest economy in the world USA I regard as an A country though not particular strong, where I rate China as a somewhat stronger macroeconomic A country. Despite the risk of a currency crisis one day I surely rate the Philippines as an A country and the same for Germany and Switzerland in Europe. Some might be surprised that I see United Kingdom as a macroeconomic A country, but I do, and I trust they will do a heroic work to stay fit.
Macroeconomic B countries will also offer investment opportunities though the environment for finding investment opportunities in A countries is simply much better. Further it will have an important impact for bond investors. How fast this development will be I see as a function of how fast, in particular, the U.S. central bank (Fed) scales back their part of the global monetary policy – though it’s not some day in the future as it already happens now.