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G7 Leaders - Small group of influential world leaders around table

New World Disorder?

World order is changing fast and not necessarily to investors’ advantage. As geopolitics enters a more dangerous era, growing divisions within the Western alliance will accelerate the move to a New World Disorder.

The post-Cold War era has been exceptionally benign for investors. Interest rates and inflation have fallen and remained low for more than thirty years, creating a rising tide that has lifted nearly all financial assets. Whether you have owned stocks or bonds, real estate or fine art, the chances are you have enjoyed substantial real returns (i.e. adjusted for inflation) over several decades.

Two tectonic shifts in world order have shaped this era: the (re-)emergence of China, and the end of the Cold War. China and the former USSR added massive new productive capacity to global markets. Rapid technological advances, particularly in computing, communications and the internet, enabled businesses to take advantage of the increasingly open world order. These political and economic shifts delivered an economic boom, lower inflation and unprecedented international peace and stability. Higher returns on capital followed.

But stability breeds instability, and many of the dynamics which have made it a Golden Age for Capital have laid the foundations for an altogether more volatile era. Falling interest rates have encouraged an explosion in debt, especially at corporate and national levels, making the financial system increasingly fragile.

The 2008 Credit Crunch embodied the risks of an over-leveraged system, following hot on the heels of the DotCom bubble. With each crisis, interest rates have been cut to new lows, creating fresh credit and asset bubbles, and encouraging further debt and fragility. When rates hit zero in the late 2000s, unconventional measures such as quantitative easing were used. Interest rate distortions rippled through the financial ecosystem. Risk became widely mispriced. After a decade of extreme monetary distortions, it is likely that we are now in an ‘everything bubble’.

And whilst globalisation has been a boon for corporate profits, the collateral impact is more mixed. Alongside the effects of mass migration and continuing fallout from the Credit Crunch, the hollowing-out of traditional industries and the communities they support has driven a political backlash within the West that is now reshaping the political landscape. So-called ‘populism’ is here to stay.

Geopolitically, the world order re-emerging is also more unstable. Today’s challenger states bear striking resemblance to the great contiguous land empires of AD 1700, including Qing China, Safavid Persia and Mughal India. Each civilisation had very different ideas about how to order society and the world around it. The challenge to the US-led world order which has underpinned post-Cold War prosperity has never been greater.

After an era of unprecedented stability, the emergent order looks increasingly disorderly, fragile and ultimately inflationary. This is a world in which record debts, strained government finances and high asset prices meet the retreating tide of central bank stimulus and authority, reduced market liquidity, resurgent Great Power politics and populism. Such a world leaves policymakers with big decisions, big debts and little wriggle room.

Investors need to take note. The breezy certainties of the post-Cold War consensus are gone. World order is in flux, and it’s all to play for.

Alexander Chartres
Investment Director (Ruffer LLP)

Ruffer LLP is authorised and regulated by the Financial Conduct Authority. The views expressed in this article are not intended as an offer or solicitation for the purchase or sale of any investment or financial instrument. The information contained in this document does not constitute investment advice and should not be used as the basis of any investment decision. References to specific securities are included for the purposes of illustration only and should not be construed as a recommendation to buy or sell these securities. © Ruffer LLP 2019 Ruffer LLP is a limited liability partnership, registered in England with registration number OC305288. The firm’s principal place of business and registered office is 80 Victoria Street, London SW1E 5JL, UK +44 (0)20 7963 8100