The key issue for international investing over the long run is whether the world is a single pole, bipolar, or multipolar set of interests and country alignment. Clearly, we moved from a bipolar world after the collapse of the Soviet Union to something closer to a singular pole. Some will say that we have a new bipolar world between the US and China, but the close interconnection between these two countries makes it hard to argue from a trade perspective regardless of rhetoric. Nevertheless, a bipolar world seems more likely as Russia and China have moved closer through trade and politics There is also a strong view that the world has turned multipolar with a broader set of competing interests across a diverse set of countries.
Is India in a single center of interest or is it something unique? Is the Middle East in two centers of influence or is it more ambiguous? Is Latin America a separate sphere of influence? The world is more complex and less clear-cut in 2023 than 1993 or 2013.
Trade lines especially with emerging markets are moving closer to a China-Asia focus than an US-EU focus. Financial flows are still dominated by the dollar, but these capital flows have been disrupted by political drama through growing sanctions. Countries want to become less dollar dependent even though it may be harder to do in practice because being on the wrong side of US policy can be harmful.
While we may not have insight on the changing tectonic shifts in geopolitics, we can say with certainty that the higher ambiguity of political relationships will place downward pressure on correlations across countries. A multipolar world will also create greater shock risk from alignment adjustments. EM risk higher in a multipolar world.
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