Stefan Strein, CIO at the Cleveland Clinic, during a panel discussion at CIO’s 2022 Influential Investors Forum, said deglobalization is his primary geopolitical concern because of its potential to reverse gains made in the battle against inflation.
Deglobalization “touches every facet of the economy,” Strein said. “It’s going to be really interesting over the next couple of years, especially as we deglobalize and potentially fragment into various factions around the world.”
The potential for deglobalization, stemming from the Russia-Ukraine war, U.S.-China tensions and China’s political and economic trends, were among other top geopolitical issues asset allocators mentioned as having a potential impact on portfolios.
Amidst pressure to deglobalize, countering inflation remains a priority throughout global markets. Jeremy Wolfson, CIO of the $20 billion Los Angeles Water and Power Employees’ Retirement Plan, highlighted that the low-inflation environment that defined the U.S. economy from the mid-1980s through 2007 featured a straight line of increasing globalization.
Over the past decades, “we got to a point of hyper-globalization,” Wolfson said. “If you look at import-and-export prices as a percentage of GDP, they’re starting to plateau and roll over. Those trends [signaling increased deglobalization] are obviously challenging institutional investors. We’re coming out of that hyper-globalization trend that we’ve seen for some time.”
The Russia-Ukraine war prompted many questions about energy and security in the West.
In reference to divesture of Russian securities in institutional portfolios after the invasion of the Ukraine, Wolfson said, “[as a public plan, the first step] was disclosure. Thankfully, we had already positioned ourselves a little bit out of the space when all this kind of came about. We did have to write a little off, and we provided information to the city council’s office. Our board really looked at their fiduciary responsibility, and at the end of the day, they took that to heart, so they told the mayor, and the council, that we’re very responsible, that we understand social issues and that it’s a human tragedy.”
At the focal point of geopolitical security is energy security, as highlighted by the Russian invasion of Ukraine. A move toward renewables and the revolutionization of world auto fleets provide avenues toward energy security.
Strein pointed out that limiting carbon output by increasing the use of electric vehicles requires cooperation among economic regions.
“Minerals for battery technologies are quite dispersed, though most of the production is done in China,” Strein said. “Unless we all are going to be driving Chinese cars in the next 20 years, we have to figure out a way to get some of these metals processed here in the United States or North America.”
U.S.-China relations are another important part of any conversation about deglobalization.
Jonathan Glidden, managing director of pensions at Delta Air Lines, which sponsors a currently frozen, but fully funded $16 billion defined-benefit plan, in addition to a $26 billion 401(k) plan, provided perspective on how different the business relationship between the U.S. and China has been since its 2001 membership in the World Trade Organization.
The evolution of China, economically and politically, has considerable influence on businesses throughout the world, Wolfson described.
“It used to be that China was run by nine people; now it is really just run by [Xi Jinping, general secretary of the Chinese Communist Party],” Wolfson said. “They tried to convert themselves into a consumption economy, going from a more export-related economy, but their emerging salaries are [now] at the top of the emerging environment. It is not as cheap as it was to produce in China as it used to be.”
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Tags: deglobalization, geopolitical, geopolitical risk, Jeremy Wolfson, Jonathan Glidden, Stefan Stein