The US and China are wrestling for global leadership. It will change investing.
This tectonic transition is upending the dynamics of free trade, globalization, and the absence of great power conflict that underpinned the steady state of the post–Cold War era. A major rethink of the way we approach investing is due.
The U.S. is imposing 145% tariffs on China in addition to levies on many other countries, while China is putting up 125% tariffs of its own. But the trade war goes beyond tariffs. The world’s two biggest economies are in a fierce competition for leadership in technology and innovation. This race, and the U.S. move to a more transactional foreign economic policy, are pushing China to embrace and strengthen the BRICS+ coalition.
Originally a loose alliance of Brazil, Russia, India, China, and then South Africa, BRICS+ now extends to an array of partner countries representing almost half the world’s population.
This maturing alliance serves as a mechanism for China to reach important markets that aren’t politically aligned with the U.S. and its coalition. Beijing’s relationships help it secure access to crucial resources, and to extend its influence, all while hedging against restrictions on access to U.S. and European markets, or potential future sanctions.
Globalization and free trade were the underlying conditions in which capital markets and investing practices were established. Those conditions are changing, and so should the investment playbook.
BRICS+ presents a formidable challenge to the West. Its members benefit from technology, energy resources, a broad range of commodities, control of major maritime and trade choke-points, expanded military capabilities, and favorable demographics.
These compelling assets explain in part the Trump administration’s focus on changing the established practices of the global economy. Under Trump, the U.S. is seeking to slow the ascent of BRICS+ and China before they become the dominant alliance in a new geopolitical era. The unipolar, post–Cold War period, centered on the U.S., has ended. What comes next isn’t certain, but for now it resembles at least a bipolar competition between the U.S. and China, each with its respective coalitions.
This global competition is the context in which we should view Trump’s interest, among other things, in rare-earth deposits in Greenland and Ukraine, his focus on the Panama Canal, and arresting the expansion of China’s fleet and shipbuilding capabilities, as well as the end of regional wars.
Globalization and free trade were the underlying conditions in which capital markets and investing practices were established. Those conditions are changing, and so should the investment playbook.
India, Russia, and China are leading a global coalition known as the BRICS+.(©Alexander Zemlianichenko/Pool/AFP via Getty Images)
For one, the distinction between developed and emerging markets is becoming blurred. No longer are developed markets the sole pioneers of technological development, the beacons of international trade, and the champions of regulatory stability and predictability. Technology is being created and enhanced in countries from both the developed and emerging markets groups; trade is growing faster within coalitions than between them; and regulatory uncertainty is most evident in the U.S., among other Western countries.
Economic fragmentation could make the cost of capital more localized to each bloc, raising its cost and implying higher interest rates. Volatility is likely to remain elevated in this ongoing transition. Some risk models that are based on historical data may underestimate the level of risk.
Fierce global competition means that companies have less reason to go public. They must prioritize protecting their intellectual capital and will be drawn to financing opportunities in private credit within the orbit of their coalition group. Investment opportunities may be better harvested through both private and public markets rather than one or the other.
Economic resilience will be a national priority for many countries. They will be prompted to diversify and focus on their industrial strategies—as evidenced by Trump’s promise to “supercharge our domestic industrial base.” Efforts to bring production home are potentially inflationary in the short- to medium term.
Policy uncertainty and political risk are rising. Investors will need to think thematically about countries’ exposure to the drivers of future growth: technology, energy supply, commodities/resources and productivity advantages.
Navigating this complex environment will require a more dynamic approach to investing. The global order is undergoing a regime change to an endpoint that isn’t yet known. The passive approach of past decades is no longer apt.
Relationships within and between coalitions are bound to evolve. Less globalization and more restricted capital flows imply lower liquidity in the markets. The effect may be further intensified by the bigger role that private markets will continue to play.
This new world will also have less risk-sharing and a lower capacity to absorb supply-chain shocks, or other disruptions. With higher volatility, the risk exposure of portfolios may need to be reduced going forward, thereby reducing the overall leverage that needs to be employed.
Navigating this complex environment will require a more dynamic approach to investing. The global order is undergoing a regime change to an endpoint that isn’t yet known. The passive approach of past decades is no longer apt. To effectively realize opportunities, investors will need to be more thematic and active in their investment process. Our portfolio playbooks need to adapt accordingly.
About the author: Maria Vassalou is the head of the Pictet Research Institute, part of the Geneva-based bank and asset manager Pictet.