The Rising Influence of Rising Affluence

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Stocks Face Threat as Globalization Loses Steam

By RIVA GOLD and GEORGI KANTCHEV
Oct. 16, 2016 2:56 p.m. ET

LONDON—Some big global investors worry that the broad slowdown in world trade and growing populist opposition to new trade agreements are undermining corporate profits and could be the next big drag on the stock market.

U.S. equity prices have been supported for the past three decades by an acceleration of global trade and a freer flow of capital. Those lifted economic growth and allowed companies to take advantage of new markets and economies of scale.

But now there is worry that the party is ending. “We believe globalization has probably reached its peak,” said Marino Valensise, head of the multi-asset team at Barings, a member of the MassMutual Financial Group with $275 billion in assets under management. “The market won’t like it.”


Barings’s senior managers every winter gather at their central London office to iron out their 10-year investment forecast. At the next one, they expect to consider reducing—or even outright eliminating—their estimate of the value globalization adds to stocks, what they term a “globalization premium.”

The Barings managers say the slowdown in global trade is one factor leading them to move away from stocks that have benefited most from globalization and into places like bonds, which are in some cases better valued than the U.S. stock market and may suffer less amid rising geopolitical tensions.

Global trade this year will grow at the slowest pace since 2007, according to the World Trade Organization, just as protectionist policies are on the rise and efforts to liberalize trade have stalled. The International Monetary Fund recently warned that anti-trade trends such as increases in tariffs could cause long-term damage to the world economy.

Some are worried this could spill over to corporate profits.

Global stock-index provider MSCI estimates that if policies such as trade protectionism and government deficit spending increase significantly in the developed world in the next two years, U.S. equities would shed more than 17%, while European equity markets would fall by close to 20%. In a stress test run by MSCI, the firm assumes that such policies would lead to stagflation, a toxic combination of higher inflation and lower growth.

Michael O’Sullivan, chief investment officer for Europe at Credit Suisse, said investors are facing a “post-globalization” landscape. “For markets, the slowdown in globalization means even more uncertainty,” he said.

http://www.wsj.com/articles/stocks-face-threat-as-globalization-loses-steam-1476644188