The planet is ripe with investment opportunity, according to most of the speakers at an ETF conference I attended yesterday in Boston. From emerging markets to sector rotation to alternative betas, optimism abounds, attendees were told.
As usual at these type of events, focusing on what could go wrong was minimized, although in fairness I did moderate a session on risk management. In any case, it was hard to miss the penchant for seeing the investment outlook as flush with possibility. That's a worthwhile perspective, up to a point, although as I listened to the speakers I kept thinking about Every Nation for Itself: Winners and Losers in a G-Zero World, Ian Bremmer's new book that I read (most of it) on the train ride to Beantown.
Bremmer is the president of the Eurasia Group and a keen geopolitical analyst. In his latest book, he argues that the world is headed for a period for a "tumultuous transition" that's bereft of the leadership that used to prevail when the U.S.-centric club of nations-the so-called G7, which evolved into the G20-kept the international system humming and put out the fires, or at least kept them from burning free. But those days are gone and "we have entered a period of transition from the world we know toward one we can't yet map." He writes that
This is not a story of the decline of the West or the rise of the rest. In years to come, none of these players will have the power to bring about needed change. The G20 doesn't work, the G7 is history, the G3 is a pipe dream, and the G2 will have to wait.
Welcome to the G-Zero
What's the G-Zero? "A world order in which no single country or durable alliance of countries can meet the global leadership."
Bremmer's argument is laid out in breezy fashion, covering the waterfront of macroeconomics, politics and international relations. It reads like an extended op-ed than with footnotes. But his view is certainly persuasive, in part because he provides numerous examples of how the geopolitical world order is evolving and what it means for the future.
For instance, the prediction by some that the rise of emerging markets will fill the vacuum left by a debt-laden U.S.-Europe-Japan power system may be expecting too much. As Bremmer explains, "the BRICS [Brazil, Russia, India, China, South Africa] countries now hold summits and talk publicly of shared interests, but there is much less to their partnership than meets the eye."
These countries don't have much in common beyond a shared desire to increase their international influence and to limit the ability of established powers to impose their will on everyone else. China and India are among the largest energy importers. Brazil and Russia are among the world's most important energy exporters, giving them a very different view of policies and events that push crude oil prices higher. China and Russia are authoritarian countries that face internal ethic and religious challenges to their territorial integrity, while India and Brazil are genuine multiparty democracies with governments that must weigh the need for sometimes painful reforms against frequent fluctuations in public opinion. China and India are rivals for influence in South Asia. China and Russia compete for influence in Central Asia-and in Russia's Far East. Brazil is the only BRICS country that lives in a relatively stable region. China, India, and Brazil each have far more trade with Europe and the United States than with Russia. South Africa, admitted to the group in December 2010, has virtually nothing important in common with any of them.
Do you see the obvious implications that flow from that multi-dimensional matrix of incentives, conflicts and challenges? Neither do I, and I suspect that it's going to be hard for most folks to figure out what's relevant, what's not, and how to tell the difference. In fact, real-time events only strengthen Bremmer's argument. For example, the latest political upset in the "revolt against austerity, cuts" in Europe is yet another sign that the rise of G-Zero world has momentum. Indeed, the triumph of Francois Hollande in the French presidential election threatens to complicate the tension between Paris and Berlin as the Continent struggles to solve its ongoing euro crisis and balance Germany's preference for austerity with France's new-found preference for fiscal stimulus. A similar conflict looks set to roll on for policymakers in the U.S., where divided already government reigns supreme and the possibility (likelihood?) of an extended run awaits after the November elections.
To the extent that geopolitics influences markets (and it does), investing isn't going to get any easier in the years ahead. Geopolitical risk is almost certainly on the rise, and for lots of different reasons. True, it's a different type of risk compared with the Cold War, but it's a risk nonetheless. More importantly, it's much more of a multi-faceted risk, which means that there are probably a lot more unknown unknowns out there.
The fact we live in a multi-polar world is no surprise at this late date. But as Bremmer's book reminds, the multi-polarity may be even more nuanced and byzantine than we thought just a few years ago.
It's easy to see a G-Zero world as favorable for investment opportunities, but it's also a world filled with new and uncertain risks. That's good news for talented managers who have the brains and the resources to navigate the shifting landscape. Well-run global macro strategies, for instance, may be well-positioned to exploit the world ahead. But history suggests that most investors (and institutions) will still have a tough time beating a benchmark of all the major asset classes. That's been true for the past decade, as my recent review of the Global Market Index vs. multi-asset class mutual funds shows. Bremmer's books implies that we should expect more of the same. In fact, if his worldview is correct, and I think it's largely on the money, then the competitive profile of broad-minded asset allocation with simple rebalancing rules is going to remain a tough act to beat. Perhaps that's the only constant you can count on when it comes to investment strategy.