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Investing in a Closed-Border World

CAMBRIDGE – Investors, like astronomers or anthropologists, rely on intellectual models to make sense of a complicated universe, guide immediate choices, and set priorities for further inquiry. But, every so often, a freak occurrence forces a reappraisal of what we think we know. It could be a black hole. It could be a strange fossil. Or it could be a political upheaval, like the Brexit referendum in the United Kingdom or the election of Donald Trump as President of the United States.

As a tumultuous year comes to a close, giddy global markets continue to set new records. But investors should not become distracted. In 2017, they will need to reappraise how the global economy works, and recalibrate accordingly their assessment of every stock or bond on sale, because even if some market fundamentals remain the same, many others have clearly changed.

For at least two decades, most investors accepted the consensus among economists and political scientists that the world was getting smaller and more integrated. With the rise of China and India, one-third of the world’s population suddenly became workers and consumers in the global economy. And new technologies offered cheap communications, advanced robotics, and increasingly powerful data analysis, which enabled companies to slim down their inventories and integrate supply chains.

Meanwhile, political leaders gradually developed regulatory and trade regimes that eliminated tariffs, simplified border crossings, and opened exciting new markets. Good companies tried to take advantage of new opportunities, and investors looked for the firms that showed the most promise.