Many recent press articles – at least those I have read – have sought to draw parallels between what’s happening now in the world with the 1940s to explain how events may play out, particularly with regard to a ‘new world order’. Content compares the spirit of the Ukrainian President, Volodymyr Zelensky, to that of the UK wartime leader, Winston Churchill. Others link the current tactics of the Russian army to those of the Red Army (before its name changed). Further publications have sought to establish how Russia’s approach mirrors that of yesteryear, not just due to the use of the term “denazification” (real or otherwise), but also given the destruction of non-military targets and unnecessary civilian deaths.
But there is an economic angle too. Initially, given the focus on oil and gas, financial market experts pointed to the early 1970s as the period to be used as a parallel to today’s global economic state. Then, inflation spiked as a result of a five-month oil embargo set by the Organization of Arab Petroleum Exporting Countries – a separate organisation to that of OPEC which formed eight years earlier in 1960. Even after the embargo was lifted in March 1974, consequences continued through to the end of the decade.
Since, however, the conversation has changed and instead similarities are being highlighted between the post-World War II economy and the post-pandemic world we live in. Both eras, for example, have been impacted by severe supply chain issues due to the huge uptick in post-shock demand. Other comparisons between the two include the increases in household savings levels, and a preceding decade of easy monetary policy and zero interest rates (initially as a result of the 1930s Great Depression and then later due to the 2008 Global Financial Crisis).
But why are we focusing on the past? Especially since many investment reports include the statement: “Past performance is no guarantee of future results”.
Here the reference to Winston Churchill is relevant given he quipped: “Those that fail to learn from history are doomed to repeat it.” These are salient words – even if history doesn’t echo exactly – as we may still experience economic pain similar to that felt between the end of World War II and the early 1960s when the Federal Reserve (Fed) aggressively tightened monetary policy and the US suffered five successive recessions. Now, as the Fed signals it may raise interest rates six more times in 2022 – a pace that would prove very rare for the Fed – similar pain may be felt again. But perhaps only if we forget what the past has shown can happen.
But while the actions of the Fed and other central banks may again negatively impact economic growth as they seek to bring ever increasing levels of inflation under control, my interest has largely focused on the rhetoric around the phrase ‘a new world order’.
Again, it’s a vision for the future that has a past. Although similar language was used following World War I, the phrase was actively employed by Churchill and others following the Bretton Woods Agreement in 1944, which saw all 44 allied nations set out a new economic system to prevent another world war. The ‘ideal’ was debated further by the US, UK and Russia at the Yalta Conference in February 1945, only to see the decisions rejected by Stalin as he drew an ‘iron curtain’ across Europe following the global armistice later that year.
In the West, however, its application flourished and led to the establishment of powerful Washington-based institutions, including the International Monetary Fund (IMF) and World Bank, as they sought to balance power beyond the biggest economies, ensuring countries would not devalue their currencies and increase interest rates merely to attract foreign bank deposits, i.e. ‘hot’ money. The resultant system also set out how world trade would be financed via US dollars. All currencies were each fixed at a set exchange value to the US dollar, which would be backed by gold.
In 1971, Bretton Woods partially collapsed as the US president, then Richard Nixon, ended the US dollar’s convertibility to gold and implemented wage and price controls. By 1973, the US dollar (and sterling) were free floating. By the 1980s, economic policy had moved on again and the approach to encourage inflows of hot money used by Ronald Reagan (and Margaret Thatcher) brought success, but mainly to dominant economies.
As a result of poorer economic results – particularly for developing nations in Latin America – a British economist, John Williamson, coined the term the Washington Consensus in 1989 to sum up what policies were believed to be fundamental to engendering success. He set out ten policies as the basis of the ‘standard’ reform package. Among these were free trade, market-led interest rate policies, floating exchange rates, a broad tax base paying moderate rates, macroeconomic stability due to low levels of government debt and few state enterprises, and legal security for property rights.
With a ‘recipe for success’ for developing economies set out, interest in these markets grew. Two years later, a report by the US investment bank, Goldman Sachs, set out the potential four economies in particular – Brazil, Russia, India and China, the BRICs – and detailed how they could come together to form a new economic force. And the “conditions for growth” echoed those of the Washington Consensus.
In the year 2000, the economies then accounted for 8% of world gross domestic product (GDP) or – to adjust for these countries’ lower prices – 23.3% at purchasing power parity (PPP). But this was expected to rise to 47% and 52% by 2050. In other words, BRIC currencies would appreciate against the US dollar by about 2.5% a year and, as a result, by 2020, BRICs would have accounted for 22% of the world economy in US dollar terms and 41% at PPP.
At first sight, the predictions proved to be on the money. The BRICs now account for 24.3% of global GDP in US dollars and 31.4% at PPP, according to IMF data. The issue is that their eminence on the global stage hasn’t expanded accordingly. Bretton Woods, after all, didn’t completely collapse. The institutions it created – the IMF and World Bank – continued, and its demise led to the establishment of the G7.
What might be irking the BRICs – and encouraging the reports of a desire for a new world order – is that China has not been invited to join ‘the club’, despite overtaking Japan as the world’s second largest economy in 2011. India too would be due a seat at the table given it is the world’s sixth largest economy and is expected to overtake Japan by 2030. And while Russia was formally included in what became the G8 in 1998, it was booted out in 2014 due to its invasion of Crimea.
Can you – even if it’s just in theory – then ‘blame’ Chinese firms for the purchase of commodities using the yuan, becoming the first shipments since the 1970s that have not used the predominant petrodollar system? Why wouldn’t India and Russia hold governmental talks to reinstate a rupee-rouble ledger for the first time since the Cold War? Even if it is controversial to change the status quo, why should the US dollar account for around 60% of the world’s currency reserves, when its nearest rival, the euro, has just 20%?
This dominance is important as it means that nations and companies have to follow US foreign policy or face sanctions. That the French bank BNP Paribas had no choice but to pay the £7 billion fine Washington imposed in 2014, for dealing with Sudan and Cuba in defiance of US sanctions, was a stark illustration of this power. Despite Britain, France and Germany remaining adamant the Iran nuclear containment deal was needed to prevent an atomic arms race in the Middle East, the US withdrawal in 2018 forced other countries and companies to follow suit.
Meanwhile, China in particular has used its Belt and Road Initiative (BRI) to encourage fealty. Apart from Russia (and North Korea), 22 of the 24 UN members who voted against the resolution to eject Russia from the UN Human Rights Council have received investment from China’s BRI. 49 of the 58 who voted to abstain have also received BRI funding. The only countries that have signed a BRI deal with China and voted for expulsion were in Eastern Europe – and therefore concerned about Russia’s desire to expand westwards – and in Latin America – countries which should benefit more from their relationship with the US than with China.
The Russian author Tolstoy reminds us in his appropriately titled novel War and Peace that the two most powerful warriors are patience and time. Patience and time could also be counted as two of China’s ‘warriors’ too. And you should factor these in to your investment approach too.
I would also add diversification. And while I doubt there are many wealth managers who would not argue that their portfolios are not diversified, it’s worth digging into the detail. We, for example, diversify across investment styles, countries, industry sectors, types of investments, but also currencies. It’s an approach we believe makes a material difference to portfolios given the global reach of our strategies – which allows portfolios to perform regardless of the source of growth given they are actively managed – and also one that sets us apart from the majority of our peers. It should help as well in a world of shifting currency ‘safe havens’.
But it is also useful – as my colleague Rebecca set out in our first article about the Russia-Ukraine war – to focus on what your wealth needs actually are. If the central banks do indeed slow economic growth by bringing inflation under control then your investment portfolios may not need to achieve the same levels of growth for you to realise your wealth goals.
In many cases, we have already found clients are actually taking on too much risk. As a result, they could invest in a lower risk-weighted strategy and still comfortably achieve their long-term wealth goals. But what’s right for one person does not necessarily mean it’s the right way for you – even if you see broad similarities – and why a bespoke approach is needed for everyone’s personal finances. This is why we structure our service to focus on one-on-one support.
To understand what your individual wealth needs are, if you haven’t already, get in touch. We can then go through how these macroeconomic trends – which often take decades to come to full fruition – could impact you as an individual and seek to set out a strategic approach that is right for you.
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Sources: Nedbank Private Wealth; Atlantic Council; Bloomberg; Federal Reserve; Goldman Sachs; IMF; Reuters; and the World Economic Forum
Investments can go down, as well as up, to the extent that you might get back less than the total you originally invested. Exchange rates also impact the value of your investments. Past performance is no guide to future returns. Any individual investment or security mentioned may be included in clients’
portfolios. They are referred to for information only and are not intended as a recommendation, not least as they may not be suitable. You should always seek professional advice before making any investment decisions.
Based in our Isle of Man office, James is responsible for delivering the end-to-end investment management process, overseeing the implementation of the Nedbank Private Wealth house view within our discretionary managed portfolios, and for developing our investment proposition.
He has over 18 years’ investment experience and has been responsible for the Nedbank Private Wealth managed discretionary portfolios since 2007. James holds the Certificate in Investment Performance Measurement from the CFA Institute.
Based in our Isle of Man office, James is responsible for delivering the end-to-end investment management process, overseeing the implementation of the Nedbank Private Wealth house view within our discretionary managed portfolios, and for developing our investment proposition.
He has over 18 years’ investment experience and has been responsible for the Nedbank Private Wealth managed discretionary portfolios since 2007. James holds the Certificate in Investment Performance Measurement from the CFA Institute.
+44 (0)1624 645100
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