Global Investments and Keeping Pace with Shifts in Geopolitics
For investors, the idea of reversing globalization is no longer unthinkable, it has become the norm across markets. Trade wars, active military conflicts, polarized blocs, national-security priorities, industrial policies, and investment restrictions have all become daily considerations for investors in major economies, let alone in traditionally more volatile emerging markets.
In this context, it can be said that the return of Donald Trump to the White House with an explicit “America First” agenda has accelerated this retreat from globalization. Yet this retreat has been underway since his first term nearly nine years ago, and perhaps even since the banking collapse of 2008. The pandemic further intensified the trend.
One of the key questions during the tariff disputes earlier this year was whether America’s exceptional performance as a preferred destination for cross-border investment had been damaged. The concern was that foreign investors holding expensive U.S. assets might sell and diversify their investments elsewhere.
As events unfolded, these fears proved premature, at least so far, even though broad hedging has taken place against the risks of dollar-exchange volatility.
However, the issue extends beyond the U.S. exception. The real question is whether a strong resurgence of “home bias” will take hold, driven by rising trade barriers, tighter capital controls, and higher valuations. At the same time, governments are launching waves of incentives to keep investment savings within their borders, often to finance national priorities such as defense, technology, or budget-related needs.
In other words, if “America First” is shaping the agenda of the world’s largest economy, should we now prepare for “China First,” “Europe First,” and even “Japan First” or “Britain First”?
Recognizing this reality, China has doubled its efforts to build its own technological ecosystem and boost domestic demand. In Europe, led by Germany, work is underway to strengthen defense sectors, infrastructure, and capital markets. Japan, the United Kingdom, and Canada are advancing similar priorities.
In an attempt to assess what a long wave of global capital returning home might mean for financial markets, particularly currency markets, Deutsche Bank sought to model the impact of repatriating a significant portion of overseas funds.
Malika Sachdeva from the Deutsche Bank Research Institute concluded that “the theme of repatriation will be structural for markets in the coming quarters and years.”
Countries whose domestic equity markets are large enough to absorb a significant share of their foreign investments include Sweden, Switzerland, Taiwan, Canada, Japan, and Saudi Arabia. Japan, France, Italy, and Britain stand out for their large bond markets.
However, after adjusting for the current mix of overseas assets and the relative capacity of domestic equity and bond markets, the paper finds that the currencies ranking highest for capital repatriation flows are the Japanese yen, the Canadian dollar, and the Swedish krona.
If the size of the domestic market becomes a constraint, part of the capital may shift toward direct investments, commodities, or even gold, and some of this may already be taking place. Whether the benefits of keeping money at home in an increasingly fragmented world can outweigh these pressures remains to be seen.
In short, the risk of excessive currency appreciation is a critical issue, with major implications for economic and monetary management, as well as currency movements. In all cases, conditions may now be ripe for a completely different configuration of global investments, one that keeps pace with the profound shifts underway in geopolitics and global trade.
