By Tim Courtney, Chief Investment Officer
The landscape of global trade is undergoing a transformation, marked by increased litigation and geopolitical tensions, particularly between the U.S. and China. These tensions have been climbing for several years and have played out in multiple ways, including the U.S. government's concerns over hardware and software security made by Chinese companies,1 and the recent bill prompting a sale or ban of TikTok.2
The subtext of these tensions is the shift away from globalization, which has implications for markets and investors. Over the last several decades globalization was a net positive for markets. It facilitated freer trade between countries, better cooperation and generally supported economic growth worldwide.3 However, the current trend toward de-globalization, prompted by a mix of geopolitical disputes and disruptions in supply chains—many of which are centered in China—is reintroducing barriers.
This trend can be seen in domestic policies such as the Inflation Reduction Act.4 The act is an example of increasing U.S. protectionism and broader reshoring trends. And while those introducing protectionist regulations often claim that US businesses in general will be advantaged, like many regulations they in practice advantage businesses that can influence the rulemaking, and often these are the largest companies. We saw regulations favoring those with bigger balance sheets following The Great Recession in 20095 and again during the bank failures of 2023. The accumulated mass of regulation over the decades has led to significant consolidation in many industries as larger firms have the scale and capacity to better navigate the complexities.
Ironically though, the rulemakers that indirectly had a hand in helping some of the largest companies are now directly targeting them. In the last year, we’ve seen several large tech companies face antitrust lawsuits worldwide.6 As a result, the risk of unintended consequences grows, and this is happening across the backdrop of uncertain de-globalization.
For investors, the changes and regulatory developments make potential outcomes more uncertain. Globalization had its costs to be sure, but it also created a level of stability as trade grew across the world. That stability is now fading and tensions are rising between the U.S. and other countries, pulling us further away from globalization. In addition, governments are getting more involved in market decisions as the scope of regulation increases. Tech companies, including the Magnificent 7, which became trillion dollar companies under less scrutiny are facing new risks.
As always, one way to defend against increasing uncertainty is through diversification. If you have questions regarding these topics, please connect with your Exencial advisor.
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