SINGAPORE (Dec 28): Anti-globalisation sentiments are on the rise. From Brexit in the UK referendum to Donald Trump in the US presidential election, 2016 is the year growing scepticism over the merits of globalisation resulted in some shocking outcomes at the polls.
“Amid stagnant median incomes and rising wealth inequality, resistance to trade is increasing, and protectionist sentiment is on the rise,” says UBS in a ‘UBS House View: Year Ahead 2017’ report.
However, this trend of anti-globalisation increases the risk for investors in small, open economies that rely on a large trading partner, UBS says.
For investors, the advice is a bit of a paradox: even as the world economy begins to look inwards, investors need to look outwards.
“Slower trade is bad for growth, but diversification and currency hedging can shield investors from some of the risks associated with anti-globalisation,” UBS says.
For example, UK-based investors who were exposed to multinational companies whose profits rose in local currency terms managed to dodge the direct fallout from Brexit and fared well in 2016.
“As political risks proliferate, investors may feel more inclined to keep money closer to home, where they better understand the political climate. But they will need to fight this instinct and invest in a globally diversified way,” UBS says.
In addition, UBS urge investors to reduce their vulnerability to global currency risks by hedging overseas investments back into local currency.
“Anti-globalisation tendencies raise the risk of sudden decline in individual currencies – hedging can help investors shield local purchasing power from the dangers of excessive currency volatility,” says the financial services firm.
In Oct, the International Monetary Fund said in its World Economic Outlook that the return of protectionist measures is a key risk to the continued health of the world’s economy.
“But this trend need not unduly impair portfolio performance, provided investors avoid concentration in small markets, diversify globally, and avoid taking undue currency risks,” says UBS.