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The global market plays to the rhythm of international economic and political events. Emerging markets and developing economies (EMDEs), in particular, are highly vulnerable to global economic fluctuations since they rely on primary commodity exports. Let’s see how these metrics shape strategies and chart pathways to informed decision-making in investing.
In This Guide
Overview of Recent International Events
All eyes, especially the bond market investors, are on France. The June 30- July surprise parliamentary elections have spooked the market. With the country edging on electing populists who pledge even more spending, there are concerns about the country’s debt load.
France aside, the global economy is divided into US-leaning, China-leaning, and nonaligned blocs. Global growth has been evident as commodity prices shot upward, driven by the US and China’s economic rebound. However, geopolitical risks have increased price volatility.
A lot has changed post-COVID-19 pandemic. Russia’s invasion of Ukraine and the Israel-Hamas War have fueled the changes in global trade. Trade wars are also having a field day, with countries reevaluating their trade relationships.
Export price fluctuations in commodity markets have significantly impacted EMDEs. Commodity prices’ reaction to global shocks has pressured the international transmission of the global financial cycle.
Economists have often warned, no side ever wins a trade war, as costs rise on all sides. The US and China have slapped steep tariffs on each other’s products, but both lost by not winning. The war has led to changes in import shares. According to a McKinsey & Company report, China’s share of US manufactured goods imports dropped from 24 percent to 15 percent between 2017 and 2023, with the electronics sector experiencing the largest decrease. Mexico and Vietnam have benefitted from redirecting trade and saw a notable increase in their share of US imports in this sector.
Trade wars aside, some countries are rethinking their over-reliance on the US dollar for international transactions and reserves. BRICS, a group of emerging markets, has suggested creating an alternative currency to the dollar.
Many economic theories explain why countries trade and how trade patterns change. These theories include differences in technology, the resources that a country has compared to other countries, and the impact of a country’s political and economic systems. Let’s see how economic and political events affect trade and investment.
Economic Events
Economic events are occurrences that affect individuals’ financial status. In respect to international trade, they the following:
- Growth: International trade follows economic expansion. As economies grow, businesses look for new markets, and consumers demand an expanded range of products and services. Conversely, economic downturns can cause reduced trade and call for protectionist policies to protect local businesses.
- Inflation: Inflation can affect global trade by altering consumer purchasing power and the cost of manufacturing. During periods of low inflation, a country’s exports may be more competitive than during periods of high inflation.
- Exchange rates: Changes in exchange rates can affect the cost of importing and exporting products and services. A weaker home currency may increase the cost of exports while lowering the cost of imports.
Political Events
The term “political” comes from “politics,” which refers to how authorities create rules and policies and manage a country’s resources, including its people.
Political events are related to these processes and actions, such as political stability and government policies. They define the laws and rules on the production and movement of products and services across borders.
Government Policies
Government policies such as laws, regulations, and administrative actions shape business practices, economic stability, societal norms, trade, taxation, labor, and the business environment. These policies also impact international relations and cross-border trade. They can either promote or impede trade.
Such policies include monetary policies like taxes, tariffs, and interest rates and trade policies like import quotas and export subsidies.
Liberal policies encourage free trade and globalization, while protectionist policies aim to shield domestic sectors from foreign competition.
Political Instability
Political instability is the likelihood of government collapse due to intense competition among political parties or conflicts, which can lead to further instability over time.
Instability deters investment and trade, which causes the economy to suffer. Yet battered economic performance can fuel political unrest.
Political stability should respect the rule of law, have strong institutions, an efficient bureaucracy, low corruption, and an investment-friendly climate to foster growth.
Impact on Different Asset Classes
International economic and political events cause shifts in market dynamics by influencing the performance of various asset classes. Let’s see how.
Equities
Bonds
Commodities
Currencies
Real Estate
Geopolitical tensions can lead to sector-specific impacts, with defense and energy stocks potentially benefiting. However, consumer goods may suffer due to reduced consumer confidence. Similarly, interest rate hikes generally negatively impact growth stocks but may benefit financial stocks.
Bond markets directly respond to changes in monetary policies and inflation rates. Rising interest rates lead to declining bond prices, particularly for long-duration bonds. However, investors see the government as a haven during economic uncertainties.
Commodities like oil and gold prices follow geopolitical events and economic policies. Oil prices can spike due to supply chain disruptions or geopolitical tensions. On its part, gold, largely used as a store of value, often benefits during periods of high inflation and political uncertainty.
The forex markets react to interest rate differentials, trade balances, and political stability. Events like Brexit have shown how political decisions can lead to significant currency volatility, affecting international trade and investment.
Rising interest rates generally increase mortgage costs, potentially cooling housing markets. On the other hand, economic uncertainty can reduce commercial real estate investment.
Conclusion
Global trade patterns have been shifting since the Cold War era. Successful investing requires understanding how politics, economics, and trade interact. Investors must stay informed on economic indicators, geopolitical developments, and policy changes. These events create confidence or uncertainty, potentially increasing or reducing investment efficiency and stability.