A multipolar world brings back the national champions

This article is brought to you thanks to the collaboration of The European Sting with the World Economic Forum. Author: Nannette Hechler Fayd’herbe, Global Head of Investment Strategy & Research, Credit Suisse

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In 2018, we moved closer to the multipolar world that looks set to replace the bipolar US-Russian geopolitical regime that emerged from the Cold War.

China’s ascent as a serious economic and geostrategic rival for the US, and its growing assertiveness with programs like “One Belt, One Road” or “Made in China 2025”, has strengthened its influence on the world stage.

The possibility that the US might withdraw from its nuclear arms treaty with Russia (China was not a signatory and therefore does not face the same limits) is a further testimony to the shifting geopolitics.

This also holds true for historical alliances. Take the US and Europe, for example, which admittedly already constituted two close but distinct economic and strategic poles. Trade and defence issues have recently revealed additional cracks in this partnership, evidenced by their diverging positions on the Iran nuclear deal and sanctions.

Struggling Western middle class

Today’s multipolar world mirrors the vast development of emerging markets, fuelled by supportive demographics and the benefits that economic globalization brings. At the same time, it also reflects the relative decline of the middle class in developed markets.

Since the 2008 financial crisis, inequalities have grown, not so much across as within countries, especially in developed countries. The economic policy mix of fiscal austerity and very loose monetary policy, which most developed economies adopted to respond to the financial crisis, proved particularly detrimental to the Western middle class.

According to a 2015 report by the Pew Research Center, 61% of US adults lived in middle-income households in 1971, with the remaining 39% living in upper and lower-income households. In 2015, the two groups were equal at 50% each.

Encroaching protectionism

Tough labour market conditions, marked by persistently high unemployment and stagnating incomes, followed the financial crisis. These were exacerbated by hyper-globalization and disruptive technologies. This combination left many middle-class households with the sense of having lost out the most in the ensuing years.

Their growing frustration led voters in the US, along with those in many European countries, to drive a political shift away from the establishment to populist governments with a new mandate to restore Western middle-class prosperity and security.

As a result, economic policy in the West has become tilted toward more fiscal policy and protectionism. The newly elected governments’ key objective is to support their domestic economy through job creation and wage increases at home, and potential regulation or taxation of certain sectors or industries. In developed markets, for example, this takes the form of more restrictions for foreign companies seeking access to domestic markets and/or greater support for domestic companies to raise their competitiveness, for instance via corporate tax cuts.

Beyond the US, where the Trump administration has taken action on both of these fronts, even countries like Germany, which were traditionally open to free trade, have started to prevent acquisitions by foreign companies when strategic knowhow is involved. The blocked acquisition of Leifeld Metal Spinning AG by Yantai Taihai Group is a case in point.

As for emerging markets, there is increased awareness that they are the consumer markets of the future due to the sheer size of their population. Governmental growth policy in these markets is moving to a consumer and services-led model, with growing median private wealth predominantly benefiting domestic companies. Should the recent trade truce between China and the US shift away from tariffs and other barriers as key policy tools, corporate and private tax competition could become the new battleground.

National champions take on new role

Against this backdrop, national champions and brands take on an entirely new role. National champions are companies in large countries with a sizeable domestic workforce in strategic sectors. They have an inherent multiplier effect that politicians can leverage, for instance to create domestic jobs or increase wages.

Furthermore, they have a large workforce that could shield them from regulation, making protectionism more likely if it would prove favourable for them. They often create so-called national brands – an extension of the national champions themselves. These brands are typically shielded against protectionist measures thanks to their diversified, loyal and less price-sensitive customer base, and their global reach. These brands also benefit from government lobbying, as Airbus did during French President Emmanuel Macron’s visit to China in January 2018, during which the Chinese government signalled an interest in buying 184 Airbus jets.

Traditional strategic sectors include homeland security and defence companies, utilities (power generation companies), telecommunication service providers and key manufacturing industries, while technology and healthcare are new entries to that list. Providers of 5G wireless technology, for example, should open up substantial growth opportunities on a global scale in coming years.

Investments in a multipolar world

From an investor standpoint, the newly emerged multipolar world brings national champions and brands into focus, including emerging market consumers. Strong national consumer brands in both developed and emerging markets, including populous countries like China, India or Indonesia, stand to benefit from greater demand from domestic consumers. Increasing fiscal advantages in domestic markets could also prove supportive for national champions.

Global security stocks will also likely attract more interest. Security, for example, has been a constant theme throughout the last 12 months. Defence spending has ramped up around the world, while homeland security remains an issue due to terrorist acts and increasing concerns about cybersecurity following hacking attacks and malware incidents.

Since US President Donald Trump’s election in 2016, NATO allies have come under growing pressure to meet the target of spending a minimum of 2% of domestic GDP on defence. The Trump administration recently reached an agreement with European NATO members to increase their defence spending, which today amounts to only 1.5% of GDP compared to 3.6% for the US.

As one geopolitical era ends and another begins, the world – and investors – must find a new way forward.