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New Investment Order

The ‘New Investment Order’ thematics we first outlined in 2021 continue to disrupt international trade and commerce with significant implications for the secular investment environment.

Geopolitically, the world continued to fracture. Long-standing alliances were challenged, there were substantial armed conflicts, and globalisation is in retreat, in line with our 2023 position paper, Geopolitics: The Bedrock of the New Investment Order. The paper set out how we define and conceptualise geopolitics, why we think it is so important, and how we incorporate such uncertainties into our investment process.

The further entrenchment of a multi-polar world or one where there are more than two major powers, continues to shape policy, financial markets and monetary policy in different ways across countries and industries.

US election

The election of Donald Trump as US President last year added layers of volatility and unpredictability.

The America-first agenda and ‘Liberation Day’ tariff announcements ignited trade disputes worldwide, rocked financial markets and caused many investors to reevaluate confidence in their portfolios.

There has been a significant reshaping of the long-established framework of relationships and alliances that have underpinned politics, trade and investment, which is creating elevated levels of uncertainty for investors.

US dollar depreciation appears to be a Trump administration policy objective. The US dollar has fallen by approximately 10% in the last year against major currencies. Continuing depreciation may be significant for international capital flows and asset values.

Alongside these dynamics, there is a widening US budget deficit, and close scrutiny on the role and decisions of the US Federal Reserve and the outlook for US Treasury yields.

The US remains an incredibly dynamic economy with a strong diversity of exposures and continues to offer many desirable investment opportunities, albeit that changes in investor sentiment and pricing of risk may see a smaller share of capital flows to the US going forward.

We continue to monitor US tariff policy for its effects on the macroeconomic environment, policy environment and financial markets. The trends towards deglobalisation, greater geopolitical tensions, and multi-polarity in world power pre-date President Trump and can be expected to continue beyond the Trump era.

Artificial intelligence

The contest between China and the US continues, including the race to dominate in AI capability.

AI is a thematic with profound implications for markets, economies, businesses and people, and it has been a focal item for discussion and debate worldwide.

It is a structural force that will shape capital flows and spur divergence in returns by region, industry and company, with the potential to change market structures and the strategic alignment between countries.

The expectation that AI could drive a boost to productivity as significant as the introduction of the internet is tempered by ongoing debate about regulation and usage.

Regardless of this, AI adoption is accelerating much faster than many anticipated, in various ways in organisations across the globe.

Global economic backdrop and conditions

We are also seeing transformative shifts in regional dynamics.

Europe has historically been constrained by fiscal targets, but we have seen a very different fiscal impulse coming from Europe, including significant shifts such as Germany shedding its fiscal shackles to increase defence spending. A common theme for financial markets this year has been whether we have seen the end of ‘US Exceptionalism,’ and many investors are questioning the ‘right’ level of US exposure as well as considering opportunities in Europe as a relatively more attractive investment destination for capital in the years ahead.

Any reduction in traditionally complex European regulatory constraints will only add to the relative appeal of risk assets in Europe.

Japan has a similar dynamic of opportunity. Reforms over time have turbo-charged the corporate environment in Japan and balance sheets are increasingly focused on delivering returns to shareholders, improving the appeal of Japan as a destination for capital. After decades of deflation, Japan is now wrestling with inflation as an issue and a return to sustainably positive interest rates will impact capital flows.

China continues to move slowly through a period of structural reform as policymakers attempt to avoid deflation and face a structural rather than cyclical decline in economic growth rates. With a potential deflationary backdrop and uncertainty on what levels of reform and policy support authorities will provide, we remain cautious on the relative attractiveness of Chinese assets.

Equity markets closed the year at new highs, and commodity markets also rose, necessitating some caution regarding correlation. We continue to hold commodities including gold as part of our initiatives to build a more resilient portfolio as some scenarios under the New Investment Order project them to perform well when geopolitical risk is heightened.

The transition to a new world is not linear. The twists and turns create a volatile economic environment that also creates significant investor opportunities as new assumptions and clarity emerge.