One major consequence of the global pandemic has been the transition from a world led by neoliberal principals, which is characterised by fiscal conservatism and falling inflation, to a world of state-sponsored capitalism, where expansive fiscal and monetary policies work together to reduce inequalities, ultimately reflating developed economies. 2022 has shown us just how violent and volatile this kind of shift can be. In such a restless environment, it is more challenging than ever to differentiate transitory from structural trends.

Many of the developments in 2022, including heightened geopolitical tensions, high inflation and rising interest rates, could indeed be interpreted as signs of new trends kicking in. However, as extreme as these short-term developments are, their usefulness for predicting long-term trends remains limited.

Globalisation is not dead

While traditional measures of trade openness have been stagnating since the Global Financial Crisis, it was the US’s trade war with China, which was initiated in 2018 by former US President Donald Trump, that really propelled the idea of deglobalisation into the mainstream. With Russia’s invasion of Ukraine, the threat of deglobalisation has never seemed more real.

On its surface, the picture seems pretty dire. Yet we continue to believe that even if global trade is stagnating and geopolitical tensions will likely also continue to send tremors through economies and markets, a full-fledged deglobalisation and decoupling remains unlikely.

There are two reasons for this. First, we believe that despite the two countries’ rhetoric and strategic ambitions, the US and China are simply too economically interlinked to allow for an abrupt and broad break in their trade relations. A recent study by the Peterson Institute for International Economics shows that, in the four years since the start of the trade war, the Chinese goods hit by high US tariffs have indeed seen a significant decline in terms of US imports. However, those goods that have not been subject to levies have actually surged, increasing by 50% (as compared to US imports from the rest-of-the-world, which increased by only 38%).

The second reason why we believe that deglobalisation will ultimately be limited is that the world is multipolar, as opposed to bipolar. Today, some countries clearly prioritise their own objectives in favour of habitually adhering to one block or another. A multipolar world order is fertile ground for geopolitical mishaps; however, it is also an environment where beneficial diplomatic and trade relations are harder to stamp out and one that speaks for a slowdown in global trade, rather than its outright decline.

End of low rates?

Monetary authorities initially did not expect the 2021–2022 inflation spike to be as strong, and certainly not as persistent, as it turned out to be. The result of the toxic inflationary mix was the 180-degree pivot from dovish to hawkish by the Fed and the most violent hiking campaign of the federal funds target rate on record. This stark shift in the policy landscape is confronting investors with an important question: “Is this the end of financial repression?”

While the surge in rates has been violent, simply stated, many of the trends that led us to declare the new era of state-sponsored capitalism are still well in play. Crucially, we maintain the view that the ‘tail is wagging the dog’, i.e. given the exponential value of financial assets in relation to global gross domestic product, changes in asset prices still disproportionally influence the real economy.

2022 tried its best to make us believe the opposite – after all, despite the sharpest drop in liquidity supply in decades, the US economy, though predictably slowing, manages to stay remarkably on course. At one point, though, if the Fed continues to blindly tighten, something will break, and this breakage will likely constrain its tightening intentions substantially.

Overall, the sheer volume of financial assets and global debt would not allow for a continuous rise in interest rates and yields, as its potential to cause systemic problems is too high. Actually, the best tools for eroding the global debt burden while avoiding a disorderly collapse of debt are low interest rates combined with higher, but contained (i.e. between 3% and 4%) inflation.

Towards a commodity super cycle?

Increasing geopolitical uncertainty, short-term inflationary pressures, and continued reliability on fossil fuels could imply that we are entering a new commodity super cycle. However, we believe it is impossible to witness a broad-scale super cycle without an accompanying oil super cycle. We do not see a strong case for the latter, however, as supplies are constrained politically rather than structurally, and as imminent structural demand headwinds will arise, especially from China.

The unlikeliness of a broader commodity super cycle does not mean that certain commodities will not experience a period of elevated prices during this decade. Looking at industrial metals, for example, there are two opposing structural trends at work influencing demand. China’s demographics and its economic transition towards slower growth act as a negative price pressure, while the growth of clean technologies has a positive influence.

One metal that deserves more attention in that regard is copper. Despite China slowly moving from boosting to breaking copper demand (Chinese copper demand is expected to peak in 2030), the energy transition will be its single strongest driver until the middle of the century, which will lead to a continuously growing global copper consumption.

Looking at the supply side, we expect to see a significant slowdown in mine-supply growth from the middle of the decade before an acceleration of scrap supplies due to a faster recycling cycle for electric-vehicle batteries will finally be able to offset this gap.

All in all, this temporary imbalance between growing demand and simultaneously declining supply leads to a very strong structural outlook for copper in the coming decade.

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