We wanted to take a moment to reflect on the evolving global trade landscape and its potential impacts on investments. The shifts we are witnessing are profound and warrant a closer look at how they are shaping our world.
To start, let us explore how some countries have ended up with a large trade surplus with the US. Since the 1970s, industrialists in the US and other developed countries have been relocating their production lines to the Far East, including nations such as China, Taiwan, Vietnam, and Korea. This strategic move has enabled companies like Nike and Apple to achieve remarkable success. With their products being predominantly manufactured abroad at lower cost, these enterprises have thrived in the US, with the result that the US has been importing more goods and services than it is exporting. This has implications for the US currency, debt levels and economic growth.
A similar trend occurred in South Africa, particularly in Cape Town. In the 1990s, Thabo Mbeki’s decision to remove tariffs on the clothing industry led to the collapse of companies such as Rex Trueform in Woodstock. Consumers began purchasing cheaper priced Chinese clothing, resulting in thousands of skilled workers losing their jobs and the local clothing industry collapsing.
For the past 50 years, the de-industrialization of the West has been a prevalent theme. Consumers continue to enjoy incredibly low-priced goods from the East. Politicians welcomed this trend as it kept inflation low, benefiting asset managers and investors as the share prices of the likes of Nike and Apple soared. However, the middle and working classes have borne the brunt of these changes, leading to growing discontent.
We are living in a changing world. On November 2024, the US electorate, faced with inflation and rising interest rates partly due to the war in Ukraine, voted for change. Last year there were a number of general elections globally. In the main, incumbent governments were ousted, and new leadership began implementing policies to address the concerns of the working and middle classes. The US decided on cutting foreign aid and reducing government expenditures, along with introducing tariffs on imported goods to encourage domestic production.
While the goal of tariffs is to stimulate local manufacturing, there are challenges. US workers are generally less productive and demand higher wages compared to their Far East counterparts, which could impact profits and lead to higher prices. Furthermore, tariffs must be strategically targeted to protect jobs and keep goods flowing. However, trade wars can create tensions between countries.
Could there be unforeseen consequences? Reduced tourism between the US and Canada is starting to emerge already, as Canadians protest. Cutbacks on USAID programs in developing countries may cost lives and long-term relationships. Soft power (the ability of a country to influence others through cultural, political, and economic means, rather than through military force or coercion) seems to have been discarded. The US’s inward focus has created vacuums that China, Russia, and potentially wealthy Arab states may fill, particularly in Africa. These geopolitical shifts have significant implications for investors.
In January 2025, the US stock market appeared to be overvalued, and diversification away from the dominant tech stocks has proven beneficial. By diversifying across asset classes locally and internationally, as well as employing protective hedging strategies, portfolios have remained relatively stable. The magnitude of these changes has left asset managers grappling with uncertainties. It remains unclear whether these developments represent negotiating tactics or long-term fundamental shifts. The consequences of the US’s withdrawal from global engagements and the resulting vacuums are yet to be fully understood. Trust, which has been a cornerstone of many international relationships since 1945, is now in question.
The next few months will be crucial in providing clarity on the future trajectory. With so many unknowns, we take comfort in the fact that you are invested in very diversified portfolios. This will offer protection in the months ahead as countries line up to renegotiate with the US. The big question is how the US and China will ultimately respond to each other. The world has changed, and now we wait to see how it settles into a new norm.
An interesting and concise summary.