Investors face challenges from a divided world

An economic environment where populism and geopolitics look set to increasingly tilt the playing field toward regional trade blocs could pose new challenges for institutional investors, market veterans say.

If globalization gives way to intraregional growth, investors could face "greater dispersion in outcomes across securities, sectors, markets, currencies, asset classes and types of investment strategy," said Simon Coxeter, Singapore-based director of strategic research, growth markets, with Mercer Investments.

Increasing trade tensions and deglobalization will create "new winners and losers and will cause trends to shift after decades of globalization," agreed Wouter Sturkenboom, chief investment strategist for the Asia-Pacific and Europe, the Middle East and Africa regions with Northern Trust Asset Management.

In that coming environment, active management and less constrained strategies will become increasingly important tools for investors looking to balance risks and rewards in their portfolios, Mr. Coxeter said.

Hannah Anderson, Hong Kong-based global market strategist with J.P. Morgan Asset Management, predicted that over the coming years countries in Asia will focus more on intraregional ties as the prospect of rising trade barriers abroad prompts policymakers and businesses in the region to "double down" on their immediate neighbors.

One trade pact, the 11-nation Comprehensive and Progressive Agreement for Trans-Pacific Partnership, went into effect just more than a year ago, while an even larger grouping — the 15-nation Regional Comprehensive Economic Partnership, which includes China — is slated to be signed early this year.

Trade expands the global economy's efficient frontier but the prospect now of more uneven progress on the trade front could pose challenges for investors looking to allocate their portfolios across markets and asset classes, Ms. Anderson said.

"In the next 10 to 15 years, regions which are growing more integrated in their trading relationships will be poised to deliver higher returns, particularly in equities," she said. Investors that have done very well overweighting U.S. stocks and bonds in recent years will increasingly need to boost allocations to emerging market equities and private equity to tap into future growth, she added.

If the world moves in the direction of regional blocs, meanwhile, Asia could prove to be the club with the cool kids — led by China, which is set to become the world's largest economy and an evermore important consumption superpower.

Meanwhile, if trade is the broad topic facing investors now, technology — where U.S. President Donald Trump is deploying sanctions and diplomatic arm-twisting to impede the global expansion of China's cutting-edge 5G technology — is the most dramatic example of the challenges investors could face in an era of heightened geopolitical conflict.

"Confrontation in the era of technology won't subside anytime soon," said Aidan Yao, Hong Kong-based senior economist (China), macro research-core investments, with AXA Investment Managers. A "digital divide" marked by competing technology ecosystems that will force other countries to pick sides between the U.S. and China hasn't arrived yet but it can't be ruled out, he added.

A January report by Boston-based investment consultant Cambridge Associates LLC said a full separation of the technology world into China and U.S. spheres is "difficult to imagine" but some decoupling should be expected — a situation that should prompt investors to seek "geographic diversification across asset classes and fundamental economic exposures."

Mr. Yao said investors are positioning themselves to benefit from China's longer-term response to the pressures it is facing now in the technology sphere, including the billions of dollars it's marshaling to develop indigenous production capabilities in areas such as semiconductors instead of relying on foreign tech heavyweights.

According to some investors, a world with growing barriers to globalized trade in technology could challenge U.S. heavyweights.

U.S. technology companies are expensive, with few easy avenues to pick up further market share — particularly if they're not able to compete in China, said Vincent Mortier, deputy general manager and group deputy chief investment officer with Paris-based Amundi. Chinese technology companies could be better placed to gain market share in their fast-growing home market, in the rest of Asia and eventually in Europe, he said.

Gary Clyde Hufbauer, non-resident senior fellow with the Peterson Institute for International Economics, Washington, said investors could be on solid ground betting that investments in China's technology companies will pay off over the long term.

With three times as many mathematical graduates as the U.S., a technology war now could slow China's immediate advance but its prospects of prevailing over the long term are seen as good, especially with the hardened U.S. stance now toward immigrants — who have accounted for an outsized proportion of startup companies in the U.S. — further handicapping the odds, Mr. Hufbauer said.

If there's one segment where globalization looks set to continue apace, it's financial market flows, analysts say.

"The globalization of investor bases is still incredibly strong," J.P. Morgan Asset Management's Ms. Anderson said. Even though over the past few months some high-profile U.S. politicians have made arguments in favor of limiting U.S. investments in Chinese companies, "I think you're going to see financial investments pushing against the wind here."

"Even in a world that has a strong impulse to separate out economic spheres … investors want to be able to move their money wherever they find the best opportunities," she said.

Particularly in a world bifurcating between China and the U.S., "some growth opportunities may only be accessible via certain segments of the investment universe," said Mercer's Mr. Coxeter, citing mainland-listed A shares as capable of providing "highly diversifying exposure" for a global portfolio.

"Home-bias investing in particular will come under scrutiny" as regional trade grows in importance and "we expect investors to take an evermore global approach to investing" in response, Northern Trust's Mr. Sturkenboom said.

Challenges from a divided world