The Changing Connectivity Of The World: Adapting To Deglobalization, Reshoring And Geopolitical Risk

The headlines on the front pages of major papers seldom spill over to the headlines of the business section. Instead, the two realms tend to operate as silos. Politics and economics—and more specifically, the vagaries of capital markets—are largely seen as being nearly unrelated.  In reality, the spillovers are considerable in normal times, and immense in the current environment.

These interrelationships are most evident given the new U.S. National Security Strategy. It poses hard questions for Canada. In response, Canada should regard the new strategy as a strategic warning and move quickly to build its own integrated policy frameworks that protect Canadian sovereignty, reinforce national security, and set the terms of our bilateral engagement. The current federal government was elected with a mandate to deal with a former ally becoming an unreliable partner in trade, defence and commerce.

Let’s look at the economic spillovers that affect everyone because of this emerging World Order. Here are the main themes and the considerations that come into play:

1. U.S.-China Strategic and Economic Rivalry

Here, the core challenge is the structural competition between Washington and Beijing. It is intensifying across technology, trade, and security. The market implications include the fragmentation of supply chains. “De-risking” and nearshoring efforts could support capital investment in friendly jurisdictions but reduce global efficiency, which often leads to inflation.

2. The Energy Transition and Resource Geopolitics

In this mega-trend, the main challenge revolves around the world’s uneven pace toward decarbonization and deepening geopolitical divides, especially among resource exporters.

Market implications are multifaceted. Canada has repeatedly stated its ambition to be a global superpower in both clean and conventional energy. Meanwhile, the voracious appetite for energy required to fuel Artificial Intelligence (AI) data centres is truly unprecedented. No one doubts the demand. Where will the supply come from and how clean will it be? 

Canada will also be front and centre in the ongoing critical minerals competition. States are racing to secure lithium, cobalt, and nickel supplies. Access risk could create sharp price swings, but it seems as though there are opportunities in the sector for those willing to take a meaningful stake. As with many of the public policy prescriptions to the immediate threat, our industrial policy will almost certainly involve subsidy-driven investment that allocates capital toward strategic sectors, even as fiscal burdens rise and debt levels mushroom.

3. Populism, Elections, and Governance

With all the redistricting and challenges to both institutions and conventional checks and balances, there is a growing sense that the U.S. has not only abandoned adherence to the rule of law in international affairs, but also in domestic matters.

In addition to the obvious political uncertainty, there may well be a challenge to fiscal discipline, influencing sovereign debt spreads and risk premia. Another American credit downgrade is not out of the question now that the accumulated national debt in the U.S. has surpassed $39 trillion. Election-driven uncertainty often reduces risk appetite and raises volatility. The new risk/return trade-off may spook investors.

4. Conflict and Risk

Finally, there are the ongoing challenges of the war in Ukraine, instability in the Middle East, and potential flashpoints in the Taiwan Strait or South China Sea. These all sustain high geopolitical risk premiums. Furthermore, armed conflict could trigger energy, grain, or shipping route disruptions.

Defence spending will boom at the expense of more traditional priorities. We’re in for a reverse peace dividend. The reallocation toward security budgets could crowd out social spending. Depending on how it is defined, “infrastructure” investment may well increase.

Overall, investors will likely have to contend with persistent geopolitical risk premia, fragmented de-globalisation, and state-driven capital allocation. This strikes me as an environment that is likely to create stagflation. Many people are too young or too oblivious to history to remember the pain most of us felt half a century ago, which is the last time we experienced such an environment. Stagflation tends to elevate demand for real assets and safe-haven hedges (gold, defence currencies, U.S. Treasuries), and to reinforce the importance of policy analysis as a core component of portfolio construction. In my practice, I exited traditional public equities long ago in favour of more defensive asset classes that are less frothy and generally uncorrelated to conventional assets. In sum, the overall backdrop involves geopolitical fragmentation, fiscal activism, and a structural inflation risk.

Here are the major asset classes, with some quick reasoning linked to the myriad interrelated forces at play. As ever, no one can reliably foresee the future. What follows is merely a roadmap involving possible outcomes if present trends persist.

1. Equities

Rising defence and cybersecurity budgets across the U.S., Europe, Japan, and the Indo-Pacific should keep military suppliers and cyber-infrastructure firms resilient. Their order backlogs and government contracts are largely insulated from cyclical downturns.

Energy producers and critical minerals should do well, too. Even as the world transitions, tight supply in oil, uranium, and metals like lithium, copper, and nickel keeps upstream producers and mining equities supported.

The “friendshoring” beneficiaries include firms in automation, robotics, logistics, and regional infrastructure (e.g., India, Mexico, Southeast Asia, Eastern Europe) that could gain from the anticipated supply-chain realignment. Again, expect higher than usual volatility—likely on the downside.

2. Fixed Income

Short-term sovereigns from reserve-currency issuers (U.S., Japan, core EU and even Canada) may be viewed as geopolitically safe havens during times of induced turbulence. Inflation-linked bonds may do well, since inflation protection remains valuable.

It may be prudent to use barbell structures (short-duration safe assets + selective credit risk) and maintain inflation hedges.

3. Commodities & Natural Resources

There may be continued underinvestment in fossil fuels. Meanwhile, the weaponization of energy supply ensures volatility and upside risk in oil and Liquified Natural Gas (LNG) is real. The Memorandum of Understanding between Ottawa and the government of Alberta is a clear indication that all levels of government have come to recognize the distemper of the time and the urgency of the task at hand. Once again, commodities like copper, nickel, and aluminium enjoy structural demand from electrification and rearmament cycles. Similarly, agricultural commodities could grow in importance, leading to support for grains and fertilizers. Exposure to tangible assets is extremely valuable under regime uncertainty.

4. Alternative Assets

Different people define this asset class differently.  Private credit and infrastructure benefit from fiscal investment and capital-market disintermediation. Geopolitical risk can even strengthen demand for local infrastructure projects. Real assets like commodities and real estate offer a hedge against supply shocks and inflation uncertainty. Finally, private equity options may uncover niches with state or industrial-policy tailwinds.

Conclusion

Since Donald Trump was elected, I’ve been a card-carrying member of team “Elbows Up”.  There is no doubt in my mind that we are heading toward severe economic consequences because of the rapidly emerging New World Order. The change is already well underway, and simply proceeding with a business-as-usual approach could be lethal. For over three years, I have been warning investors about the dangers of the subtle, but pervasive effects of bullshift. The finance industry has long been shifting our attention to make us feel bullish. We urgently need to remove the rose-coloured glasses immediately to see the world as it has shifted. More than ever before in our lifetimes, we need serious contemplation followed by purposeful action regarding how we manage our finances.

John De Goey is a Portfolio Manager with Designed Securities, regulated by the Canadian Investment Regulatory Organization and a Member of the Canadian Investor Protection Fund. He is also the host of the Make Better Wealth Decisions podcast.

Disclosure statement: The opinions discussed are those of Mr De Goey and may not be shared by Designed.