Deglobalization has been top of mind for investors. Here's what we think is important to keep in mind. There are two kinds of globalization: trade and financial. Trade globalization has certainly been on a downswing over the last several years, accelerating, driven by Trump administration's actions, recent supply chain disruptions, COVID crisis, and the recent spike in energy prices. Financial globalization on the other hand has been on an upswing driven by more and more invites, invoicing, occurring in a single currency. And cross border ownership of assets continues to rise.
The winner in this globalization battle has been the US dollar. We find the US dollar has become the dominant currency of choice for economic activity, resulting in the fact that when you look for hedging against local or global shocks, US Treasuries have become the dominant instrument for hedging of choice. Now, what that means for investors is that there is commonality in terms of the use of the instrument. And then US monetary policy transmission is much faster than it has been previously. In a world of low interest rates, the ability of US Treasuries to hedge is waning.
Investors would be wise to think about other alternative sources of hedging: these may commodities, currencies, like the EUR/JBY pair, diversification across regions and styles and equities, and finally flexible asset allocation as a means of creating some diversity in their portfolios.
