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Finding Sustainable Growth in a Fragmented World

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The global investment environment is increasingly fragmented. Although it has become the norm to say we live in a globalized world, we are also witnessing growing schisms within the “global village.”

This is not “reverse globalization,” but rather a process that has arisen from globalization itself, in many ways triggered by the 2008 financial crisis. The fragmenting world has important implications for investors.

Fragmentation in the Global Village

At a macroeconomic level, globalization has led to increasing economic integration. However, the financial crisis has halted and in some cases reversed this trend. What we are witnessing today in Europe is a prime example.

At a microeconomic level, although average economic well-being has improved, income inequality has increased in nearly every country, and has risen twice as fast in developed countries over the last 30 years. In the United States, for example, the richest 1% earns almost a quarter of all income, up from 13% in the early 1980s. The top 20% of the population owns 93% of the country’s wealth and earns 60% of total income.

Events in the Middle East have provided a salient example of how the pre-crisis order has broken down. In December 2010, the self-immolation of a Tunisian fruit seller set in motion a chain of historic events, culminating in the removal of four long-standing autocrats. Now, the countries of the Middle East stand at an important juncture, with some (Egypt, Tunisia and Libya) potentially on the verge of democratization.

A Volatile Environment

Climate change also exacerbates these schisms, adding another unpredictable element for global investors to contend with. The U.S. is currently in the midst of its worst drought in 50 years. As a result, corn, wheat and soya prices have spiked, with the price of corn for year-end delivery up over 50%.

Food inflation can be a significant source of social unrest. Rising food prices between 2009 and 2011, for example, were a contributing factor in the Arab Spring uprisings. Surging food prices pushed more people into poverty in a region where 15% to 20% of the population already lives on less than $2 a day. The drought will also put upward pressure on oil prices as corn is a key ingredient in ethanol, and the U.S. government is under pressure to divert corn away from ethanol production in order to avert a global food crisis. If the situation in the Middle East or Iran escalates, the resultant oil price spike could put serious pressure on the global economy.

It’s impossible to attribute a single weather event to climate change, but extreme natural events are only going to increase, and investors must be aware of the global implications.

Investment Implications

The key conclusion to draw is that growing fragmentation gives rise to increased market volatility. Fragmentations may materialize in conflicts, drive economic divergence or, at the very least, add complexity and confusion to decision-making processes. As short-term noise increases, the value derived from analyzing long-term earnings potential is all the more crucial. What is increasingly clear is that investors who want to achieve long-term value must focus on growth that is sustainable beyond the financial crisis, the European debt crisis and other sources of volatility. Investors must reconnect with fundamentals and assess which companies successfully tap into sustainable end demand.

Achieving sustainable growth is difficult in any setting; this is all the more so in today’s global economy where growth is, to a certain extent, saturated by the results of past excesses in developed markets and finite planetary resources. We are currently witnessing far-reaching structural shifts: Economic momentum continues to shift to emerging markets while the aging developed world is attempting to set in place structural reform and reduce dependence on debt. As stock pickers, we must investigate closely the ability of corporate management teams to operate in this increasingly volatile environment.      


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