Each year APCM’s investment committee reviews our secular outlook to determine what factors will be driving the global economy, and thus global markets and returns, over the next ten years. This research provides us with the inputs that we use to develop and manage portfolios, as well as a framework to understand current events as they unfold. The secular outlook is the backbone to our portfolios as it helps us form reasonable return expectations that will determine what asset allocation you need to meet your financial goals.
In preparation for this review, I’ve been reading about global trade. This has been a controversial topic recently, but an undisputed fact is that global trade is slowing down. Global trade is measured in two ways: the dollar value of goods and services or the volume of goods and services. The chart below depicts the annual total value of global exports measured in U.S. dollars. As you can see, the dollar value of global trade declined in 2015 after essentially being stagnant since 2012. It’s not just prices that are contributing to the decline in value, the volume of trade has been growing at just half the pace of previous economic expansions. Another point of interest is that the decline has been widespread with the slowdown observed in 143 of 171 countries studied by the International Monetary Fund (IMF). So why does this matter? Global trade is highly correlated with global economic growth. Patterns in trade provide us with clues that help determine how much growth we should expect to see in the global economy in the coming years.
Chart: Wells Fargo Securities
Brandy (our CIO) always reminds me that there are two types of economic factors: structural and cyclical. Structural changes are shifts in the basic ways that an economy functions. Cyclical changes are the swings in response to where we are in the business cycle and are driven primarily by supply and demand. When analyzing what is causing the slowdown in global trade, economists have determined that there is a mixture of structural and cyclical forces at work.
The two primary structural changes that have been suggested are the maturation of global value chains and China’s process of transitioning from an emerging industrial driven economy to a developed service driven economy. Neither of these changes are necessarily bad. The development of global value chains because of free trade agreements and reduced trade costs has been one of the primary drivers of trade growth over the last several decades. The IMF notes in their most recent World Economic Outlook that there are now less economic gains to be made and an increase in protectionist policies has led to less trade deals being formed to make said gains. There are less emerging economies to integrate into the global economy and many supply chains that led to cost savings have already been developed. This isn’t to say that there aren’t still gains to be made, they are just less significant in comparison with the progress of the last several decades. China’s transition toward a developed economy can also explain some of the slow down. Instead of spending all its resources building cities and roads and factories, the country is broadening its focus to financial health and other reforms.
There are also several cyclical factors that are depressing global trade data. Many commodities were at decade low prices, which resulted in a lower dollar value of trade even though trade volumes were constant. The other contributor to sluggish trade growth has been a lack of investment spending following the financial crisis. Some of the lack of investment can be explained by the slow economic recovery, while some can be attributed to low commodity prices as many exporters reduced capital spending in response to persistent low prices. The good news is that since these are cyclical, we shouldn’t expect the slowdown in trade to be permanent.
Global trade is just one of the topics that APCM’s investment committee will be discussing during our annual review that is coming up in a few weeks. We look forward to sharing our conclusions with you soon!