Eoin Treacy's view

Here is a link to the full report and here is a section from it:

While we focused on the stock market above, investors can of course suffer material losses being concentrated in other assets as well. One particularly egregious example is German bonds from WWI, which lost 95% of their value relative to cash in the year or so after Germany surrendered. Despite earning more than a 900% excess return since then, investors concentrated in German bonds in this period have never recovered their wealth.

Over the past 40 years, economies and financial markets have been driven closer together by globalization and the free flow of capital, under the auspices of the US at the helm of the global economic and political order. So the past few decades of returns vastly understate the potential benefits of geographic diversification because of the unusual environment of high correlations across countries. As one indication of this, the chart below shows equity correlations across countries against the size of exports as a percent of the global economy back to 1825. The surge of globalization in the postwar era under US dominance, with rising trade and capital ties between countries globally, has led to unprecedented high correlations among the equity returns of different countries. In the past, there have been ebbs and flows in the pace of globalization—including a period of rising trade tensions culminating in the world wars—and of course we see rising anti-globalization sentiment resurging today.

Going forward, rising conflict around trade and globalization may increase divergences across countries. Additionally, China’s ascent as an important economic and financial center with divergent secular conditions from much of the developed world (e.g., more ability to stimulate in the event of a downturn) raises the likelihood of an increasingly multipolar and less correlated world. All of these forces raise the importance of diversification going forward. 

The rise of populism in the world’s major democracies is being seen as a crisis by those most at risk of losing their position. However, it is above all a reflection of the elasticity of democracy, where we have the opportunity to propose solutions to problems of falling living standards. No one is under any illusion this process is easy but it will have long-term benefits for all of society. The fact we can have these kinds of discussions in democracies is a major strength because totalitarian societies have no room for discussion and are therefore more susceptible to collapse.

The rise of China is a major geopolitical and economic event. The Xi administration has a clear intention to reshape the global economy, with China at the centre. Meanwhile the USA is now the world’s largest energy producer and is set to become a meaningful exporter within the next few years.

In between, Europe does more business with China than the USA, is dependent on Russia for energy but has more common political and military ground in common with the USA. That holds out the prospect of Europe becoming a political plaything once more in any future conflagration.

Meanwhile India and Brazil are falling within the USA’s sphere of influence while much of Africa has embraced China’s cash. That suggests we are already in a multipolar world but the polarity is only likely to become more exaggerated over coming decades.