Embracing the opportunities of a multipolar world

The Battle of Red Cliffs (赤壁之戰) at the end of the Han Dynasty, ca. AD 208

“The world under heaven, after a long period of division, tends to unite; after a long period of union, tends to divide. This has been so since antiquity”

Ancient Chinese proverb

The Chinese believe that the above saying accurately describes the great affairs of the world.

Two millenniums ago, after almost four centuries of rule and a golden age, the definitive Han dynasty became to come apart. A period of peace and prosperity gave way to a period of chaos and hardship. Political struggles, warlordism, famines and disasters eventually led to the well-known Three Kingdoms period after the Han collapsed.

Despite the massive social upheavals, there were innovations in military technology, agriculture, and social governance systems, spurred on by the competition between rival warlords fighting to unify the realm.

New trade routes and systems were also established by various factions after the old imperial customs collapsed, and various influential leaders of that time went on a recruitment spree for talented people to build a legitimate government and improve the peoples’ livelihoods to earn the Mandate of Heaven.

Long Zhong Dui” by Miao Zaixin
The warlord Liu Bei consults the scholar Zhuge Liang for advise, ca. AD 207

While a united realm did bring prosperity and a divided one brought chaos and suffering, the competitive spirits that were unleashed in the latter also brought about vital social changes that were beneficial only decades later when peace is won.

And how appropriate this is for our current times…

End of global cooperation & towards regionalisation

There is pretty-much a consensus that the Pax Americana (U.S.-led world order) that began after the Second World War is gradually disappearing. This trend exacerbated after the 2008 Global Financial Crisis, and enough articles and books have been published expounding this narrative. But its ramifications are unclear and remain to be understood.

Firstly, the supranational global governance infrastructure established by the US will increasingly be tested to the limits when crises hits and cooperation breaks down. The world caught a glimpse of this during the COVID-19 pandemic, and with this year’s food and energy issues, it remains to be seen if they are effective in fulfilling their mandates. At best, these institutions remain but evolve, while some become obsolete as circumstances change and power vacuums materialise.

This trend isn’t unlike the late-Han period where imperial authority diminished or the end of the Roman Empire when Roman institutions and practices collapsed and disappeared, giving way to localised customs and governance (the start of Medieval European kingdoms). Countries and governments that are reliant on the supranational infrastructure may disappear altogether.

Secondly, a cultural shift towards regional networks (if a spirit of cooperation remains) and sovereign independence is likely to occur over time. Lower levels of trust among governments and a lack of a powerful party to arbitrate conflicts will accelerate this trend. We could see re-writing of multi-lateral trade agreements as economic activity and patterns change.

Gradually, governments and groups of people may be less willing to be identified as a ‘bloc’ depending on how their key interests align or diverge. For example, although the current Russia-Ukraine conflict may have rejuvenated NATO’s purpose and identity, it isn’t entirely clear that there is a west versus east spectrum, with many countries in the developing world actually refusing to take a side.

Intense competition for resources, technology & people

With a fragmenting global world order and a move towards regionalisation and national determination, there will be a push for securing critical supplies that would be difficult to obtain in this new world arena.

Firstly, without energy, the world falls back to the Middle Ages. The current energy crisis in Europe highlights the importance of having critical energy infrastructure. And typically, that means having a secure source of baseload power that governments can rely on.

There will be a massive build-out of the energy sector and the power grid in many countries (it wouldn’t matter whether its renewables or fossil fuels eventually). Countries that will have the cheapest energy costs in the future may likely see their asset markets outperform their peers.

Secondly, critical resources such as certain base metals and food supplies are areas of focus in a multi-polar world as various trends and globalisation have led to production concentrated in only a few regions of the world. Securing critical minerals from sustainable sources will be at the top of western governments’ agendas, while food security will be paramount for those who are net-importers (this has huge implications on agri-tech, fertiliser production, and land usage).

Governments may turn to public-private partnerships to boost resource production, and capital will be invested in technologies that will significantly improve yield. For example, the Singapore government’s 30 by 30 plan to produce its own food involves sci-fi-like ventures such as cultured meat, and the project is a sign that the island country is preparing for higher self-reliance.

Thirdly, digital infrastructure (both software & hardware) and cybersecurity will be crucial in this new world order. The 2010s saw a rapid growth in consumer-tech, but in the decades ahead, capital and talent will be invested in cybersecurity to shore up defenses in crucial networks that will allow data-storage and commerce to be safe.

Digital infrastructure also falls back on the backbone of the semiconductor industry. However, the fierce competition and sheer amount of capital expenditures that go into this industry may portend low future investment returns – something investors without an information edge should be cognisant about.

Make no mistake about this, the three areas mentioned above will be long-term, structural trends in the decades ahead.

Also, like the warlords of the late-Han period, there will be a hunt for talented and trustworthy people for these critical sectors above. Just like how the US and UK governments egged their brightest minds into war industries and military technology research during the dark days of WWII, China is doing the same now for a range of critical industries for national security amid heightened geopolitical tensions with the US.

What is deemed as “orthodox” economics will change

I wrote about the use of fiscal policies and the rise of Modern Monetary Theory (MMT) some years back and how it’s gaining traction as an economic ideology. But in the years ahead, more “experimental” economics will be practiced by policymakers desperate to shore up growth and to appeal to their electorate. This makes all the more sense given the context of widespread wealth and income equalities in both the developed and developing world.

For example, the new UK government’s policies under prime minister Liz Truss seems outright preposterous. But as Anatole Kaletsky wrote in a recent note:

“The pound’s flirtation with dollar parity on Monday, the collapse of the gilt market on Tuesday and the Muppet Show presented by the Bank of England in response to both crises have turned Britain under Truss into an international laughing stock. Yet looking below the surface of these events suggests some rational arguments for some, though not all, of the “crazy” policies adopted by the new British government—arguments which policymakers in other advanced economies could start to think about if they ever stop laughing:

1) The top priority for macroeconomic policy in a time of war, international supply upheavals and energy transformations is to avoid a deep recession that would cause mass unemployment, prevent investment in new infrastructure and permanently weaken public finances.

2) Inflation can be limited by price controls and fiscal subsidies for a year or two, provided monetary policy is also tightened to ensure that demand conditions turn disinflationary in the longer term.

3) Fiscal policy can influence economic activity more directly and rapidly than monetary policy. A policy mix of fiscal expansion and monetary tightening can therefore stimulate economic activity in the short term, while controlling inflationary pressures in the longer term.

4) The scope for fiscal expansion should not be governed by arbitrary rules or targets, but by objective measures of fiscal sustainability, such as a stable long-run ratio of government debt to GDP.

5) Maintaining fiscal sustainability, as defined above, becomes easier if the target debt-to-GDP ratio that a country is trying to stabilize is fairly high.”

The willingness to experiment will also involve 21-st century technology such as digital currencies (i.e. CBDCs). While still a relatively new and evolving arena, policymakers that master this technology can deliver sharper and more tailored policies when required, which will have huge implications on economic planning.

Investors have to be open-minded and be willing to disregard whatever economic beliefs and ideologies that are deemed “conventional” the past three/four decades. This ultimately creates a more volatile macro regime, leading to a tremendous amount of opportunities in markets.

Evolution in corporate behaviour

A myriad of changes will take place among corporations around the world. Depending on the nature of their operations and how global they currently are, they are likely to:

  • rely less on outsourcing; or be more deliberate where and how production will be outsourced to.
  • build up more buffers and redundancies (just-in-time production only makes sense in a globalised world where trade lanes are safe and cheap labour can be fully exploited).
  • reduce overall portfolio leverage (a lower-geared balance sheet improves odds of survival in an unfamiliar geopolitical climate. This also depends on how capital markets and capital hubs evolve in this changing world order).
  • work with governments where interests align.

Additionally, as trade patterns and economic activity change in some areas of the world, multi-national corporations are forced to adjust while they balance keeping their operations and capturing various market opportunities. This is a world where maximisation of profit margins and optimisation of operations will eventually be lower on management’s priorities, leading to implications on how their valuations should be understood and assessed.

A time for everything

While it may seem precarious, it’s probably because of the highly uncertain environment that the world is going into. We’re reminded that there’s a time for everything and a season for every activity, a time of peace and war, and a time of unity and division.

A multipolar world requires investors not only to take stock and reassess what they’ve been used to over the past four decades, but to also embrace the opportunities that it brings as well.

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