U.S. President Donald Trump's proposals to erect trade barriers and restrict immigration may just be a taste of what's to come for the next several decades, according to a top money manager at Morgan Stanley (MS) - Get Report.
Ruchir Sharma, who oversees more than $20 billion of assets in developing countries like China and Brazil, says the world is entering an epoch of "deglobalization," triggered by a populist backlash against the increase in global trade, migration and capital flows that took place from 1970 to 2008.
And it won't be pretty. The last period of deglobalization lasted from 1914 to 1945, according to Sharma, coinciding with two world wars. Worldwide economic growth is likely to slow dramatically.
On the other hand, wealth inequality may decrease as workers wrest power away from corporations, leading to rising wages -- and higher inflation.
Over the course of history, "you see waves of globalization, a backlash develop, you begin a period of reversal, and then the wave begins again," Sharma told trustees of the Teacher Retirement System of Texas, a $133 billion pension fund, at a recent meeting in Austin. "What history tells us is that this could last for many, many years."
Trump's surprise victory in November came amid a wave of nationalist movements around the world that also included last year's decision by British voters to exit the European Union, colloquially known as Brexit. In France, a far-right politician who has pledged to ditch the euro as the country's national currency in favor of a new franc is leading polls ahead of presidential elections scheduled for April. Investors already are referring to that possibility as "Frexit."
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The new U.S. president pledged during his campaign to erect stiff tariffs on imported goods from China and renegotiate the 23-year-old North American Free Trade Agreement with Canada and Mexico. Since taking office in January, he has signed orders banning entry to citizens from seven majority-Muslim countries and stepping up deportations of undocumented immigrants.
Sharma, a two-decade Morgan Stanley veteran who started his career as an analyst in Mumbai, appeared at the Texas pension fund's board meeting on Feb. 23 via a closed-circuit broadcast from London. Underscoring the irony, David Kelly, chairman of the Texas fund's board of trustees, and Chief Investment Officer Britt Harris cracked jokes before and after the presentation about how a man in London with an Indian-British accent was giving them a primer on deglobalization.
According to Sharma, the latest wave of deglobalization began with the financial crisis of 2008. Since then, net migration from less-developed countries to wealthier places like the U.S., Europe and Japan slipped by 25% in the five-year period through 2015, to 12 million people.
And the number of countries with annual output growth above 7% slipped to six last year from an average 52 during the period from 2003 to 2007.
Economic "experiments" are becoming more common, such as India's controversial ban of large currency bills as part of a corruption crackdown and Poland's support for a cut in the retirement age, Sharma said. A slide accompanying the presentation listed an unattributed quote: "Trump's trade policies become more shocking by the day."
Geopolitical tensions are rising. There were more than 20 international conflicts last year, exceeding the pace of the late 1980s, which preceded the collapse of the Soviet Union, according to Sharma. Global defense spending could double in the next 15 years, Morgan Stanley predicts. Trump's administration has traded barbs in recent weeks with Chinese officials over territorial disputes in the South China Sea, a major shipping corridor that's believed to hold rich oil deposits.
Deglobalization probably will lead to lower growth. From 1914 to 1950, for example, the global economy averaged 1.8% expansion per year, compared with 3.6% from 1990 through 2008.
"It's getting more and more difficult for countries to grow," Sharma told the trustees. "Some offsets will come from tax cuts and deregulation."
In other words, Trump could simply represent a harbinger of what's to come.