The Great Reversals

Introduction

We are witnessing the beginnings of a long-term economic transition where the nations of the world seek to reverse the centuries-long growth in burning carbon to fuel the global economy. At the same time, we are seeing the early stages of a reversal of the four-decades-long trend of globalisation. This inception of deglobalisation began with the Donald Trump-led trade war with China and a desire to protect technological advantage, subsequently reinforced by supply chain risks triggered by COVID and energy dependence risks that emerged from the Russia / Ukraine war.

Key findings:

1. Decarbonisation: we expect an extended period of ‘double spending’ on the existing carbon energy system, and on building out the new energy systems, a feature exacerbated by the current ‘under-spend’ relative to what is needed to meet net zero timeframes.
2. Deglobalisation: re-orientation of the developed world’s manufacturing base away from geopolitically risky locations towards higher cost but ‘friendly’ nations, resulting in the erosion of efficiency gains of globalisation in exchange for perceived national security.
3. Inflation: We believe the combination of the above two trend reversals is likely to be inflationary, rather than deflationary, which increases the risk that the great moderation of interest rates seen since the 1980s also begins to reverse, with implications for the cost of capital and investing.

Author: Ben Goodwin, Analyst/Portfolio Manager

This material has been prepared by Merlon Capital Partners Pty Ltd ABN 94 140 833 683, AFSL 343 753 (Merlon), the investment manager of the Merlon Australian Share Income Fund and the Merlon Concentrated Australian Share Fund (Funds).  It is general information only and is not intended to provide you with financial advice or take into account your objectives, financial situation or needs.  To the extent permitted by law, no liability is accepted for any loss or damage as a result of any reliance on this information. Any projections are based on assumptions which we believe are reasonable but are subject to change and should not be relied upon. Past performance is not a reliable indicator of future performance. Neither any particular rate of return nor capital invested are guaranteed.