Why country matters
Global investment decisions often start at the top.
Twenty-five years ago, the collapse of the Thai baht spawned an Asian financial crisis that whipped through global markets, forcing the Fed a year later to rescue a high-profile hedge fund whose board included two Nobel Prize-winning economists. The bailout of Long-Term Capital Management illustrated how interlinked global economies, markets and investing had become. At the time, we had just begun ranking countries as part of our effort to mitigate risk and identify opportunities. The timing couldn’t have been more fortuitous. Along with the natural ebb and flow of economic cycles and geopolitics, the intervening years witnessed major market-shaping events and the emergence of powerful secular trends that have dramatically shifted the global investment landscape. From large-scale economic developments—the advent of the euro, the rise of China, the impact and fallout from two unprecedented global crises, the 2008 financial crisis and the 2020 Covid pandemic—to the widespread adoption of the internet and other technological advances, the world has become a highly integrated marketplace. What happens in Thailand doesn’t just stay in Thailand anymore.
Globalization has been at the heart of this shift, of course. With geographic borders effectively rendered meaningless, currency and capital flowed freely, allowing businesses, consumers and investors to shop the world for goods, labor and opportunities—helping raise global wealth, drive down inflation and accelerate growth in many former lower-income countries. China—now the world’s second-largest economy—is the most obvious manifestation. But South Korea and other East Asian “tigers,’’ Brazil and much of Latin America, and large swaths of the old Soviet Europe are examples, too. Over the past 25 years, emerging markets, many home to a younger, growing populace, have taken their rightful seat at the global economic table, some such as Korea graduating to developed status while others as a group now accounting for roughly 60% of global GDP, almost double their share three decades ago, according to the International Monetary Fund.
To be sure, globalism isn’t without challenges. The past decade has seen the rise of populism/nationalism (think Russia, Hungary, Brazil, Mexico, Brexit/the U.K., even Trumpism in the U.S.), food and resource shortages brought on by devastating droughts and floods and in some cases by political unrest, and a pandemic that exposed the risks of unfettered supply chains. Onshoring and regional trade blocs are replacing offshoring and global trade pacts. Free trade and disinflation are giving way to tariffs and higher inflation. Technology standards may remain more regionally ensconced, with countries suspicious of the potential for abuse by others. Indeed, prolonged conflicts in the Mideast and the rise of autocracies in much of the world have cast doubt on the influence of the U.S. and its status as the world’s policeman.
This is not to suggest globalization is entirely over, or that its days are numbered, but that its stripes have changed. The genie is out of the bottle—there is no going back. But navigating the global marketplace arguably is as tricky as it’s been in decades. A looming global recession, with Europe in the crosshairs. A Russia-Ukraine war that’s threatening to drag on. A declining working-age population in China, where growth is challenged by overdevelopment and strict Covid policies. Climate change with its increasingly disastrous impacts all over the world. And the aforementioned populism. All represent obstacles (and opportunities), underscoring the need to consider country exposure when making international investing decisions. While the world has changed and the roadmap may be more treacherous, the risks and opportunities have not. A trusty compass will help.