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The beginning of the end or the end of the beginning?

Seventy five years after it was fought, D-Day remains one of the most vividly recalled battles in history. By nightfall on 6 June 1944, some 156,000 Allied troops – including British, US and Canadian forces – had landed on five of Normandy's beaches, despite challenging weather conditions and fierce German defences. The Allies established a foothold in France and within 11 months the Nazis were defeated and the war in Europe was over. To commemorate the famous battle, hundreds of veterans recently gathered in France, to honour the sacrifice of those who died on that historic day. Through the two-days of giving thanks wreaths were laid, a minute’s silence was observed and the veterans linked arms, sang songs and remembered their fallen comrades. Thanks to them, the word ‘war’ is something subsequent  generations have not had to think about anywhere near as often – but in the economic sense, is it now something we are hearing about much more frequently?

Thankfully, we are living in the most peaceful era in history. International wars have dropped to an all-time low and few states invade others in order to conquer and swallow them up. This was, of course, how great empires were once established and the way most rulers and populations expected things to stay. Since the end of WWII in 1945, however, no independent country recognised by the UN has been conquered and eradicated from the map. Limited international wars still occur and sadly cost the lives of many, but wars – at least from a military perspective – are no longer the norm.

Why have wars, in this guise, become so rare? The historian and philosopher, Yuval Noah Harari, in his book Sapiens (2011), argues there are two important reasons. First, the human price of war has gone up dramatically, stating ‘The Nobel Peace Prize to end all peace prizes should have been given to Robert Oppenheimer and his fellow architects of the atomic bomb. Nuclear weapons have turned war between superpowers into collective suicide and made it impossible to seek world domination by force of arms’.

Secondly, the financial profits of wars are not what they once were. Aggressor nations used to be able to enrich themselves by looting or annexing enemy territories. Most ‘wealth’ consisted of land and the resources therein, like gold or oil, so it paid to loot, or occupy it. But this last point prompts the question, how is a nation’s wealth defined today? Yes, natural resources and financial reserves remain valuable, but Harari contends wealth now – and in the future – will consist mainly of ‘human capital, technical know-how, and complex socioeconomic structures such as banks. Consequently, it is difficult to carry it off or incorporate it into one’s territory’. 

World War II in Europe was principally a result of one aggressor nation – Nazi Germany – adopting a strategy to increase its wealth and influence by ignoring international borders and legal property rights, in order to take possession of the Urals' minerals, the Ukraine's rich arable land and Siberia's forests. They incorporated all this into their territory, as they sought to build their own empire – the Third Reich. To reverse this, the Allies (and Stalin’s Red Army) took back all that had been stolen, with the operations on D-Day being the start of the final chapter to complete the task. In other words, that war followed the traditional blueprint of all the wars that had come before it. It seems apparent that the conflict we are having to consider today – namely trade wars – also look to be following the revised scenario Harari presented in his book.  

Technical know-how

Trade disputes between the US and various parts of the rest of the world have been a feature of Trump’s protectionist-styled presidency, since he took office. However, from a global financial market perspective, it is the ongoing quarrel between the US and China which is currently driving asset prices. A few weeks ago, it appeared we were heading towards a truce; Trump was under pressure at home and needed a ‘win’ on trade to help his re-election chances and China wanted a deal as it needed a stable trade environment, to help manage its domestic slowdown.

This landscape changed in Q2 as, from an economic growth perspective, both countries appeared to be doing better than forecast. Each then flexed their negotiation muscles and Trump reverted to Twitter, on 5 May 2019, to advise the world a deal was a long way off. Given what we have seen in the past, this could be Trump’s next move in the trade game of poker he and his administration have been playing. In much the same way as the Allies used an elaborate array of inflatables (see tank below) to deceive and confuse the Germans as to where the D-Day landings would take place, Trump may be doing the same with his verbal and tweet-based communications.  


We can, of course, only guess at his next move, but what we may be sure of is technical know-how and intellectual property rights are increasingly taking centre stage in this dispute between the superpowers. In August 2018, the US Congress passed two important pieces of legislation; The Foreign Investment Risk Review Modernisation Act (FIRRMA) and The Export Control Reform Act (ECRA). Both of these, according to the Bank of International Settlement, will control the transfer of ‘critical emerging and foundational technologies’. The China-based multinational technology company Huawei is the first to be caught by this legislation and it is unlikely to be the last. The irony here is military conflicts in the past were commonly periods when technological advances accelerated – think of the rocket and nuclear programmes of WWII. In this and future conflicts, it seems likely protecting or stifling the spread of technologies will often be a key strategic aim.

Implications for portfolios

A dovish Fed, a range bound dollar and positive global growth would ordinarily present an attractive backdrop for emerging market assets. However, investors cannot currently see beyond the perils created by the trade dispute between these two superpowers. Global EM equity indices are increasingly tech-heavy, from a sector perspective, and we would not advocate investing passively in this space. We have, however, started to see a dispersion of returns from our active EM equity managers with those adopting a ‘value’ approach to investing starting to outperform ‘growth’ orientated managers. This suggests investors are not abandoning the asset class and – like us – believe patience will be rewarded.

The successful landing of the Allies on the beaches of Normandy marked the beginning of the end of WWII. Sadly, it would seem we have not yet reached the end of the beginning as far as trade disputes are concerned. Perhaps the world today would benefit from the type of leadership that leads to the end of conflict, as opposed to nationalist rhetoric and belligerent negotiations.

Julia Warrander and Russell Waite

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