Divesting From the Enemy

May 30, 2024

As some readers may recall, members of the Marquette Research Team presented a flash talk on deglobalization at our 2023 Investment Symposium given the proliferation of trends including onshoring and reshoring over the last several years. Another trend that supports the idea of reduced global integration is the drop in foreign direct investment (“FDI”) that has occurred in recent time. Indeed, according to The Economist and IMF, when compared to the six years leading up to the pandemic, average FDI flows dropped by nearly 20% from 2020 through 2022. A variety of factors have contributed to these dynamics, including supply chain disruptions caused by the COVID-19 outbreak, the Russian invasion of Ukraine, and trade tensions between major economic powers.

It may be of particular interest to readers to examine the extent to which capital flows between certain countries have shifted since the start of the pandemic. Perhaps unsurprisingly, the IMF notes that these shifts have been asymmetrical across geographic regions, with Asian countries bearing the brunt of the overall decline in FDI. For instance, both the U.S. and countries in Europe have materially decreased levels of FDI to China since the start of 2020. These dynamics are outlined in this week’s chart.

The Economist notes that geopolitical alignment has served as a major driver of the recent diverting of capital flows and is also a key factor in cross-border bank lending and portfolio flows. To that point, the upcoming presidential contest in the U.S., as well as other high-profile elections across the globe, may be crucial in determining the flow of capital over the coming years, as well as the extent to which deglobalization trends persist. Marquette will continue to closely monitor the impact of geopolitics on the global economic landscape and provide counsel to clients accordingly.

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