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Capital Market Assumptions: The Persistence of Global Trade
Globalization is evolving, not disappearing. Political tensions and shifting supply chains are reshaping trade, but the world remains highly integrated.
- Capital Market Assumptions
- Market & Investment Trends
- Portfolio Construction
- Commentary
Key Points
What this is
Globalization isn’t unraveling, it’s adapting as geopolitical shifts reshape trade agreements and investment trends.
Why it matters
While the rate of growth in global trade has slowed, we caution against confusing lower growth with deglobalization.
Where it's going
Geopolitical tensions are morphing supply chains and trade pacts, likely leading to risks and opportunities over the next decade, presenting investors with the opportunity to be increasingly selective.
Every year, Northern Trust’s Capital Market Assumptions Working Group develops forward-looking, historically aware forecasts on global economic activity and financial market returns. We analyze historical relationships between asset classes and drivers of asset class returns, and we develop forward-looking investment themes to inform how those relationships and return drivers may change in the future.
Our 2025 Capital Market Assumptions 10-Year Outlook contains three themes that examine the trends we see affecting the markets and economy over the next decade, providing the foundation for our asset class outlooks. One of the three themes is Globalization: Bent, Not Broken, and that is the focus of this article.
Globalization: Bent, Not Broken
are morphing supply chains and trade pacts, likely leading to risks and opportunities over the next decade. U.S.-China relations will likely continue to play an outsized role, but increased fragmentation could hurt global economic growth and increase inflation. However, the world is still highly integrated, leading us to view further fragmentation as a risk but not a foregone conclusion.
While the rate of growth in global trade has slowed, we caution against confusing lower growth with deglobalization. For example, while net has declined as a percent of the global economy, the total stock of FDI has continued to grow. Further, trade of goods as a percent of the global economy has stalled, but services trade hit an all-time high (Exhibit 1). Some slowdown may be a natural transition after a period of robust growth, but may not necessarily be a long-term trend.
Direct investment by a firm in one country (the source country) in productive assets in a foreign country (the host country).
EXHIBIT 1: Global Trade Keeps Going
Trade of goods as a percent of the global economy has stalled, but services trade hit an all-time high.
Source: World Bank, data from 1960 to 2023. Historical trends are not predictive of future results.
Notably, we are seeing shifts in the patterns of globalization and rerouting of trade. U.S. trade is moving away from China and toward the likes of Vietnam and Mexico1. Meanwhile Vietnam and Mexico are trading more with China.1 The International Monetary Fund recently identified sharper declines in trade between regional blocs than trade within those blocs.
Increased fragmentation could lead to lower global growth and higher inflation, along with lower supply-chain resilience and market efficiency. Inversely, the trade realignment may produce investment opportunities and fewer unfriendly trade partners, potentially reducing risk for investors. With this in mind, investors may consider more selective investments in countries or industries, as opposed to larger trading blocs and broad indices.
The geopolitical environment may play a hand in shaping the globalization backdrop over the next decade. While we generally see the impact of global political events on financial markets as transitory, politics can drive business and government policies that impact investing longer term. Hot spots which could feed Globalization: Bent, Not Broken include the Russia-Ukraine War, Middle East conflict and U.S.-China tension. How countries, regions or blocs react, will likely be influenced by energy independence, technology and military security — reinforcing the importance of and navigating the energy transition (two other themes in our Capital Market Assumptions Outlook).
We take some comfort in signs that trade is being rerouted, not cut off, and fragmentation may be overstated. We believe the world is still highly integrated by a complex web of linkages that should provide incentive to continue to cooperate with global partners. So for now, increased fragmentation is a risk case, not a foregone conclusion. However, we do not dismiss this risk as there is potential for fragmentation to worsen, and of course consequences related to that downside scenario.
About the CMA Process
Every year, Northern Trust’s Capital Market Assumptions (CMA) Working Group gathers to develop long-term financial market forecasts. The team adheres to a forward-looking, historically aware approach. This involves understanding historical relationships between asset classes and the drivers of those asset class returns, but also debating how these relationships will evolve in the future.
Our forward-looking views are encapsulated in our annual list of CMA themes, which — combined with our quantitative analysis — guide our expectations for long-term asset class returns. The CMA return forecasts are combined with other portfolio construction tools (standard deviation, correlation, etc.) to annually review and/or update the recommended strategic asset allocations for all Northern Trust managed portfolios and multi-asset class products.
The CMA Working Group is composed of senior professionals from across Northern Trust globally, including top-down investment strategists, bottom-up research analysts and client-facing investment professionals.
1 "Global Supply Chains: The Looming “Great Reallocation”, Alfaro, Laura and Chor, Davin, September 2023
Main Point
Globalization: Bent, Not Broken
Globalization is evolving, not disappearing. Political tensions and shifting supply chains are reshaping trade, but the world remains highly integrated. While goods trade has slowed, services trade is thriving, showing how globalization continues to evolve.
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