What Multi-Polarism Brings

Mark Carney, now Canada’s Prime Minister, is a familiar figure to Standard Chartered Bank. He was the keynote speaker at our flagship Market Outlook client event in early 2023, where he discussed about the structural shift in inflation.

For three decades after the collapse of the Berlin Wall, globalisation drove efficiency gains, reducing costs and keeping inflation low. However, as the world became more multi-polar, protectionism was once again on the rise, disrupting supply chain, leading to structurally higher inflation.

The Challenge from Inflation

This current environment poses a major challenge for central banks, as inflation shocks become larger and more frequent. In the US, after nearly 2 years of focusing on non-farm payroll data, the market is once again prioritising CPI figures. Amidst greater uncertainties, managing inflation expectations has become a key tool for central banks to maintain credibility and long-term price stability.

For investors, inflation expectations and their leading indicators will now matter as much as actual inflation. This underscores the need for strategic allocations to inflation hedges – favouring gold when growth is weak and commodities when growth is strong.

US Tariff-Policy, Stagflation Risks and Implications of US “Un-Exceptionalism”

Uncertainties around US trade policies, particularly tariffs, has contributed to lacklustre performance of US assets so far this year, amid rising concerns about stagflation.

Historically, US-only recessions are rare but not unprecedented. According to the World Bank, there have been only four global recessions since 1950, all coinciding with US recessions. However, not every US recession has led to a global recession. In fact, the US has experienced six additional recessions independently since 1950, with the recession following the dot-com bubble burst around 2001 and the initial phase of the global financial crisis the more recent examples.

There are clear distinctions in terms of financial market performance during periods of US-only recessions and global recessions. During a US-only recession, US equities underperform their global counterparts. The Fed typically responds by cutting interest rates, thereby bolstering US government bonds.

However, given the absence of flight-to-safety from abroad, the USD typically falls alongside US equities, while gains in US government bonds are also not as material as they would have been during a global recession. Traditional US safe havens are thus not as effective in a US-only recession.

Multi-Polarity and the Importance of Diversification

While tariffs represent a near-term headwind, the broader concern lies in the increasingly isolationist stance by the US. Meanwhile, Europe’s reversal of fiscal restraints and China’s resilience despite tariffs underscore the growing competitiveness of other global powers.

Diversification is not only crucial in a volatile and uncertain environment but also enables investors to capitalise on attractive opportunities elsewhere while waiting for US-related uncertainties to ease. Emerging Market equities and bonds stand to benefit from potential USD weakness. The potential for further increases in allocation to Chinese equities, particularly in technology stocks, is encouraging – this sector offers earnings upgrade potential.

Additionally, gold offers hedging benefits during periods of US ‘un-exceptionalism’, providing portfolio stability and downside protection. The JPY is also an attractive diversifier and has historically performed well when global investors seek safety away from US assets.