Insights

Author: Ben Goodwin, Merlon Analyst/Portfolio Manager

Introduction

We are witnessing the beginnings of a long-term economic transition where the nations of the world seek to reverse the centuries-long growth in burning carbon to fuel the global economy. At the same time, we are seeing the early stages of a reversal of the four-decades-long trend of globalisation. This inception of deglobalisation began with the Donald Trump-led trade war with China and a desire to protect technological advantage, subsequently reinforced by supply chain risks triggered by COVID and energy dependence risks that emerged from the Russia / Ukraine war.

Key findings:

1. Decarbonisation: we expect an extended period of ‘double spending’ on the existing carbon energy system, and on building out the new energy systems, a feature exacerbated by the current ‘under-spend’ relative to what is needed to meet net zero timeframes.
2. Deglobalisation: re-orientation of the developed world’s manufacturing base away from geopolitically risky locations towards higher cost but ‘friendly’ nations, resulting in the erosion of efficiency gains of globalisation in exchange for perceived national security.
3. Inflation: We believe the combination of the above two trend reversals is likely to be inflationary, rather than deflationary, which increases the risk that the great moderation of interest rates seen since the 1980s also begins to reverse, with implications for the cost of capital and investing.