The world post COVID is driven by security rather than economic considerations, but this doesn’t mean we will head down the path of deglobalisation, AustralianSuper says.
The world investors are facing post COVID looks very different to the one before the pandemic, as geopolitical events have shifted the focus away from accommodative policies that gave priority to economic growth towards policies that emphasise security.
The pandemic, the war in Ukraine and the rising tensions between the United States and China have created an environment of high inflation, a rising cost of capital and, most likely, lower growth going forward.
And while investors previously were able to largely ignore geopolitics in setting their investment strategies, they now have to assess how these events affect their long-term ambitions, Amber Rabinov, Head of Macro Research, AustralianSuper, said at the Frontier Annual Conference in Melbourne last month.
“It’s now security that is the key driver of policy; it is not economics anymore,” Rabinov said during a panel discussion.
It's now security that is the key driver of policy; it is not economics anymore
“We’re talking about geopolitics, so immediately what might jump to mind is defensive security. But it goes beyond this.
“There is resource supply security, there is technology security, security of supply chains, security of our labour supply and security for the future of the health of our environment.”
The end of the Cold War in 1989 and China joining the World Trade Organisation in 2001 were two key events that drove an increase in global interconnectedness and opened large, new sources of supply to many developed countries. It created a more flexible economic environment with low levels of inflation and interest rates in much of the world.
But then the pandemic arrived and Russia invaded Ukraine. These events highlighted the vulnerabilities in the supply chain for many companies and economies. At the same time, the US-China geopolitical tensions and rivalries have only intensified.
“Now the US says that they’re prepared to accept the economic costs to protect US national security by passage of the CHIPS Act, Inflation Reduction Act and also ‘friendsharing’, a term popularised by US Treasury Secretary and former Fed Chair Janet Yellen,” Rabinov said.
“This means that trade fragmentation, non-economic trading, industrial policy, increased defence spending, an extra layer of insurance is now being built into interactions.
“Now, keep in mind that trade interconnectedness is going to remain high. Here, we’re talking about de-risking, so this is a term that was coined by European Commission President Ursula von der Leyen, and popularised by US National Security Advisor Jake Sullivan. De-risking, not decoupling. We’re certainly not talking about deglobalisation.”
Inflation
The shift to a focus on security would mean the industrial policies of various countries around the world would likely emphasise technological competition and the energy transition, Rabinov said.
This, in turn, is likely to keep inflation relatively high.
“Cost considerations are often subordinate to other requirements. In the immediate term, the capital-intensive nature of spending and investment required is going to be extensive,” Rabinov said.
“This will add to the demands and challenges of monetary and fiscal policy. Debt sustainability will come into greater focus and interest payments add to deficits.”
It means economic restructuring isn’t anywhere near done yet, she argued. “This process has only just begun. Key macro drivers are likely to become more volatile after a period of relative moderation. And this includes the regulatory environment,” she said.
We as investors will need to be particularly forward-thinking in terms of how regulation may change and what that may mean for the assets that we hold. The days of incremental policy liberalisation and an increasing laissez-faire approach … they're gone
“We as investors will need to be particularly forward-thinking in terms of how regulation may change and what that may mean for the assets that we hold. The days of incremental policy liberalisation and an increasing laissez-faire approach … they’re gone.”
It also means the cost of capital will continue to rise, while a return to the pre-COVID, low-rate environment is not on the cards for some time. In this environment, central banks may need to accept a higher level of core inflation, driven by supply dynamics rather than excess demand, Rabinov said.
“Given our role as long-term investors, we’re going to need to look through the cycle to these secular dynamics, and also their economic implications, as we endeavour to maximise returns,” she said.
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