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For politicians and political parties in Europe and the US, the promise of protectionist policy has proved to be an efficient tool for gaining electoral support. However, from a macroeconomic standpoint, the benefits of protectionism are far less clear-cut.
After all, global economic growth and global trade growth tend to have a strong positive correlation. In this month's edition of the Global Risk Radar, we would like to talk about global protectionism and how this looming economic risk can be hurtful to investors.
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In general, protectionism is the tendency of countries to support parts of their domestic economy at the expense of openness to international trade. In this regard, protectionism is closely linked to the notion of populism (think Donald Trump: "Buy American, hire American") which has recently been on the rise in some of the major economic regions.
Establishing a timeline for the risk of rising protectionism is a complicated task. On the one hand, it is a macroeconomic risk that could manifest itself slowly over many years to come (see latest "Years Ahead" publication for long-term scenarios on future globalization trends). On the other hand, many of the risk scenarios that we currently monitor over a six-to-12 month horizon could also trigger a protectionist shock. Here, the most likely candidate would be an unexpected policy initiative by the current US Administration – a scenario that we consider further down in this report. Further down the line, European disintegration or a China hard landing could also cause disruptions to global trade channels.
Overall, we do not expect that any global risk scenario on our radar, including a significant rise in protectionism, would materialize and derail global markets in 2017. Accordingly, we continue to prefer riskier and more lucrative investments over safer assets like high grade bonds. However, we still believe it is very important to diversify globally and take global risk scenarios into consideration when making investment and asset allocation decisions.
What is the global risk radar
CIO risk scenarios are defined and developed by the CIO Cross-Regional Investment Office in collaboration with CIO economists and asset class experts. Scenarios are chosen for coverage based on estimated probability of occurrence and expected global market impact over the tactical investment horizon of six to 12 months.
Are you ready for the futures?
No one knows precisely what will happen in the years ahead. How the world responds
to observable trends, from the retreat in globalization to the advance of robotics, will be key.