As global investors we are accustomed to navigating different—and oft-changing—environments. After all, our focus is a disparate collection of more than 10,000 publicly traded equities around the world. And even though we shy away from making dubious macro or country calls (we rely on a combination quantitative and fundamental analysis to build bottom-up portfolios), we feel it’s imperative to acknowledge that we may be in the midst of a new wave of deglobalization. What does it all mean for global equities investors?

Rewind

Globalization—the interdependence among the world's economies and populations—has been made possible to a large degree by a confluence of factors, including declining transportation costs, open borders, free-flowing capital and knowledge, enhanced communication, and host of innovative technologies that have made the world a smaller place. On the whole, global economic growth and prosperity has been good for both developing and developed nations, and it helped many third world countries narrow income inequality, raise living standards for millions, and lower levels of poverty. This trend was fairly robust up until the time of Global Financial Crisis in 2008, which disrupted our inter-connected financial infrastructure. 

Since then, however, an alarming move toward deglobalization has seemingly taken hold. This has been illustrated by heightened geopolitical tensions, nationalism, protectionist economic policies, weaponizing vital commodities, and even supply chain shocks. Deglobalization was further spurred on by the pandemic, which closed borders abruptly and hampered global trade. More recently, the Russian invasion of Ukraine exacerbated matters.  

From our perspective, deglobalization is not a good thing. After all, if global trade can help elevate third world countries and lift wide swaths of people out of poverty, the opposite would seem to hold true as well. Without globalization, poorer countries may have a difficult time finding a catalyst to propel growth.
 

Fast Forward
 

All this may sound ominous from a global investing perspective, but that doesn’t mean investors should shy away from global equities. To the contrary, we continue to believe in them as part of a diversified portfolio. And while we are not advocating for a prolonged era of deglobalization, we still must learn to adapt to this new reality. With that in mind, here are some high-level observations and considerations: 

1. Lean into diversification potential: Ironically, this new era of deglobalization may offer global investors even more robust diversification benefits. We see correlations among global equity markets on a downtrend, and any further decoupling of economies would suggest that countries will increasingly be on different economic cycles. As different regions pursue different policies to help their own economic situation, the result will be variable return profiles. A single global manager may have the capital allocation framework and insight to identify opportunities across many regions. 
   
   
2. Tilt toward quality: Just as economic cycle correlations may fall, return dispersion may stay high. This is a constructive set-up for active managers. In general, we consider companies that exhibit quality characteristics to be well positioned. These tend to be consistently profitable businesses (as opposed to more speculative growth companies), with healthy balance sheets, access to capital that will enable them to withstand uncertainties, and strong pricing power. If ever, now may be a time to favor stock picking over indexing. Higher return dispersion points to the stronger impact of stock selection.
   
   
3. Expect—and manage—volatility: If the recent months are any indication, we expect periodic bouts of elevated volatility to persist. This only heightens our conviction for investing in a diversified portfolio of vetted, high-quality stocks, which we believe is the clearest path to attractive risk-adjusted returns in both high- and lower-growth environments. Importantly, having proper risk protocols in place and skewing toward a lower volatility-portfolio is preferable in these times. 
   
   
4. Consider global developed equities: The outlook for emerging markets is cloudy at best, and many emerging economies may not fare as well as their global developed counterparts in this environment. A strong U.S. dollar, which remains the world’s reserve currency and is buoyed by both flight-to-quality properties and interest rate differential, is likely to act as a headwind for emerging markets as an asset class. The cost of borrowing is on the rise for developing nations, and in some countries the possibility of default looms. Yet we continue to believe in the long-term benefits of allocating to global equities.

Ultimately, we don’t make the rules or set global economic trends, we simply adapt to them. Deglobalization is bound to hamper global economic growth, with smaller, poorer nations feeling an unequal impact. That said, global equity investors may be able to better navigate these challenges by embracing diversification, managing volatility, and skewing toward quality companies with reasonable valuations.