The US & China aren't decoupling, but are disassociating in key economic areas, with Europe facing a difficult balancing act. This accelerates the trend towards a multipolar world. Morgan Stanley Research identifies key sector trends and implications.
About a year ago, Morgan Stanley published a 'Slowbalisation' report, which argued that geopolitical issues would accelerate pre-existing trends that were slowing the process of globalisation. For some time now, the trend has moved away from the unipolar 'Washington consensus' when the world appeared convergent politically, economically, and socially. Since its publication, there has been plenty of evidence that the economic power centres of the US, China, and by consequence Europe are following this path. In Morgan Stanley’s view, if they continue down this path, the end is a multipolar economic world.
What does a 'multipolar economic world' mean?
In a multipolar economic world, you have groups of nations with enough influence and incentive to pursue economic strategies that, if achieved, do not substantially follow the same direction of other global power centres. Currently, this is best seen in the different tracks of the US, China, and Europe with regard to their intended policy direction regarding global economic interconnectedness.
Underlying all of this is the concept of 'slowbalisation' – the natural slowdown of globalisation as countries prosper, the economic benefits of near-shoring become more apparent, and some nations rise in prominence, prompting geopolitical stress. 'Slowbalisation' is an idea first popularised by Dutch academic, Adjiedj Bakas, stating the trend of globalisation would naturally slow as a consequence of its own success in enriching emerging economies.
Five reasons for the trend towards multipolarity
Over the past year, Morgan Stanley believes geopolitical tensions have both resulted from and contributed to 'slowbalisation', prompting a trend toward multipolarity. There are five issues that are likely influence the landscape:
US/China tensions likely to endure: While the 'phase 1' trade deal between the two major powers was important, what's followed is a further demonstration that both sides' ambitions stop the status quo from enduring. Tariffs may have held steady, but tighter export restrictions and the decertification of Hong Kong's special status with the US are just two ways in which the US continues to express its intent to draw barriers around at least certain types of commerce.
Europe, Japan, and the rest of the world to strike a balancing act: Europe lacks a clear mechanism or incentive for addressing the challenges to its own interconnected nature to both the US and China, with negotiations often complicated by its two-track relationship with both markets as key customers and competitors. Meanwhile, Japanese corporations have customer bases and supply chains that are ever more skewed to the rest of Asia notwithstanding rivalries with China.
Multilateralism is in retreat: Consensus-based mechanisms have proven ill-suited to negotiations between an increasingly large/diverse membership. For example, the US decision to block the appointment of new members to the World Trade Organization's Appellate Body has undermined its ability to settle disputes, one of its key functions. The transition from formal institutions to unilateral action and informal multilateralism is a sign of a multipolar world.
Alternate development models are being offered: Improved Sino-Russian relations, the emergence of China's Belt and Road Initiative (BRI), the Asia Infrastructure Investment Bank, and the New Development Bank (previously the BRICS Bank) are clear signs of a shift to a multipolar world, providing alternatives to the Bretton Woods institutions and setting up a competition for influence between the US and China.
Health security concerns may exacerbate slowbalisation: The Covid-19 pandemic appears to have caused fresh concern in the US about the preparedness of US industry for a pandemic response. Specific policy actions to address these concerns are still emerging in the US and internationally. But at a minimum, it suggests that companies could seek to geographically diversify their overseas supply chains, and that governments may be willing to adopt policies to facilitate this transition.
Broader investment theme implications of the shift to a multipolar world
A key feature of the potential emergence of a multipolar world is that economic cycles and financial market trends are becoming less US-centric and more multipolar in nature.
A multipolar world is already driving changes in correlations for industrial production cycles, global commodity prices, and bond and equity market returns. Equity market valuation dispersion is rising.
Morgan Stanley predicts the US and China will increasingly compete directly in multiple spheres ranging from technology, security, health policy, financial markets, and corporate governance. Meanwhile, Europe, Japan, and the rest of the world (including large emerging markets such as Brazil and India) will attempt a balancing act, vying for influence and economic opportunity.
For more on the multipolar world, or a copy of our full report, “Investing For a Multipolar World" (23 June, 2020) speak to your Morgan Stanley financial adviser or representative. Plus, more Ideas from Morgan Stanley's thought leaders.
