Economic nationalism a threat to equities

The growing trend towards economic nationalism may ultimately hurt international equities, according to Talaria Asset Management chief investment officer, Chad Padowitz.

Discussing Talaria’s latest quarterly outlook, Padowitz noted that the global economy is moving from a period of global integration, which began in the early 1990s, towards a period of heightened nationalism and trade protectionism, led by the US.

“Geopolitical events, including economic nationalism and onshoring, require a fresh assessment of capital, risk, and how countries depend on each other,” he said. “We are in the midst of a fundamental change to the global integration we’ve witnessed in the past three decades.”

Governments globally are increasingly influencing capital movement through policies that encourage domestic investment. Examples include the UK’s Mansion House reforms, which aim to direct up to US$65 billion into domestic projects by 2030, European proposals for defence bonds, and changes to the Australian Future Fund’s mandate.
“All these initiatives are designed to reduce the flow of capital to other regions or countries,” Padowitz said.

“This trend shows a broader increase in economic nationalism, a force that has grown stronger and is causing governments to direct capital within their own borders.”

The COVID-19 pandemic highlighted the dangers of long overseas supply chains and showed that western domestic manufacturing was not resilient enough, accelerating the shift towards internal focus. US policy changes this year under the Trump administration have fast-tracked this move towards nationalism and onshoring.

“A shift in US policy, America First, has further driven a turn inward, firstly in the US but then in other countries that had previously been happy to rely on overseas production,” Padowitz said.

For investors, Talaria says all this may mark the end of a period of strong asset price increases, where nominal cash flow growth and the cost of funding moved in ways that significantly increased the value of many assets.

“There is a lot of noise in financial markets today. The broader battle for attention that now drives the media has resulted in a distracting cacophony,” he said.

“Beyond the noise there are several significant developments for investors to consider, but if we had to identify a single item not to lose sight of it would be this: as the monetary regime transitions, the conditions that underwrote rising valuations across a range of assets are no longer in place.

“Our approach for this new environment is to prioritise resilience. This means focusing on short duration assets, companies with strong balance sheets, exposure to real assets, and strong diversification to manage investments in a world characterised by fragmentation and increased uncertainty.”