Worlds apart: Risks and opportunities as deglobalisation looms


With trade relations more fragmented and the potential for a great power rivalry between the U.S. and China, investors need to be ready for a new paradigm.


June 5, 2023

Kelly Bogdanova
Vice President, Portfolio Analyst
Portfolio Advisory Group – U.S.

This is the first article from the “Worlds apart” series, which explores the trend away from globalisation and its ramifications for investors, economies and financial markets. The following is an executive summary of the full article .

Geopolitical power struggles shouldn’t be underestimated

Globalisation boosted economic growth, corporate earnings, and stock prices for decades. But in recent years globalisation has stalled out. It seems at risk of breaking down into deglobalisation as geopolitical tensions persist.

  • The U.S.-China relationship has become mired in mistrust, security concerns, and disputes related to Taiwan.
  • Saudi Arabia and other Middle Eastern countries no longer view the U.S. as their principal ally. They have forged close, formal strategic partnerships with China.
  • Two entities in which China, Russia, and India play key roles – the BRICS association and the Shanghai Cooperation Organisation (SCO) – are expanding their memberships, and countries within them are deepening their ties. Their economic influence is growing.

BRICS GDP surpassed G7 GDP in 2021, and the trend is expected to continue

Share of global GDP based on purchasing power parity in U.S. dollars*

Share of global GDP based on purchasing power parity in U.S. dollars

The line chart shows the proportion of global GDP based on purchasing power parity for G7 and BRICS countries annually from 1995 through 2028; data from 2023 through 2028 are based on IMF projections. In 1995, there was a wide gap between the two groups with the G7 at 45% and BRICS at 17%. The G7’s GDP as a proportion of global GDP has declined meaningfully since then, while the BRICS countries’ GDP as a proportion of global GDP has steadily climbed. The IMF projects this trend will continue through its forecast period of 2028. The G7 and BRICS share of global GDP was equal in 2020 at 31%. Thereafter G7 had declined to 30.4% and BRICS increased to 31.6% by 2022. By 2028, the IMF projects the G7 will decline to 27.8% and BRICS will rise to 33.6%.

  • G7 countries
  • BRICS countries

* Data from 2023 through 2028 are IMF projections.

Source – RBC Wealth Management, IMF database; data as of 5/17/23

The sticking point for the West

BRICS and the SCO seek to form a “multipolar world” wherein a number of countries would play global leadership roles.

  • Many countries within BRICS and the SCO view the U.S.-led Western hegemony as a relic of the past or something that will be soon.
  • They have stated the world has moved – or is moving – beyond the post-Cold War era when U.S. leadership reigned supreme, and Washington and its allies set the terms.
  • BRICS and SCO countries have a lot of economic, commodity, and rare earth mineral leverage to assert a more collective, multipolar approach.
  • But we highly doubt the U.S. and its allies will quietly acquiesce to this framework. No power that has sat in the driver’s seat for over 30 years would willingly relinquish its dominant role.
  • Therefore, the geopolitical power struggle will likely persist and intensify.

Why it matters

We think major shifts in relations between great powers change the investment environment.

  • The geopolitical power struggle creates risks for economic growth, markets, and sectors – and therefore for portfolios.
  • But it should also provide investment opportunities.
  • Many countries are attempting to develop technological security, energy security, food security, and health security initiatives – all of which dovetail with national security.
  • China has been pursuing this sovereign development strategy for many years with economic planning and significant R&D spending.
  • The U.S. and its allies have recently begun to encourage and incentivise onshoring of manufacturing and “friend-shoring” (i.e., developing and strengthening supply chains among allied and like-minded countries).
  • These initiatives should benefit a number of industries, including advanced semiconductor technologies, artificial intelligence, cybersecurity, critical minerals and rare earths, energy transition technologies, water resource technologies, select industrial and infrastructure technologies, military and space equipment, biotechnology, and life sciences.

Protectionism appears to be back

There are, however, downsides to the drift away from globalisation. We view onshoring and friend-shoring as old-fashioned protectionism with new, more palatable names.

  • If protectionism persists over the long term – with more trade barriers, tariffs, and sanctions piling up – we believe the economic drawbacks would eventually come home to roost.
  • Many companies could be faced with higher expenses, more friction within supply chains, and more difficulty sourcing select commodities.
  • The International Monetary Fund’s chief wrote, “The longer-term cost of trade fragmentation alone could range from 0.2 percent of global output in a limited fragmentation scenario to almost seven percent in a severe scenario – roughly equivalent to the combined annual output of Germany and Japan.”
  • Most sources agree that if technology cooperation between the U.S. and China is cut off to a great extent, there could be more damaging global economic consequences.

The bottom line for investors

We believe these trends argue for rethinking portfolio allocations.

  • Sub-asset allocations within equities and fixed income should no longer be viewed through the lens of cooperative globalisation.
  • Instead, they should be viewed through the lens of trade fragmentation and protectionist risks, and the realignment of relations between nations into formal and informal blocs.
  • We think this begs for more active asset management for country, industry, and company investment exposures.
  • A number of strategically important industries seem poised to benefit. But if the protectionist trends persist over the long term, global economic growth and equity market gains could be more muted than they were during the globalisation heyday.

For in-depth information, please see the full report: Worlds apart: Risks and opportunities as deglobalisation looms .

This publication has been issued by Royal Bank of Canada on behalf of certain RBC ® companies that form part of the international network of RBC Wealth Management. You should carefully read any risk warnings or regulatory disclosures in this publication or in any other literature accompanying this publication or transmitted to you by Royal Bank of Canada, its affiliates or subsidiaries.

The information contained in this report has been compiled by Royal Bank of Canada and/or its affiliates from sources believed to be reliable, but no representation or warranty, express or implied is made to its accuracy, completeness or correctness. All opinions and estimates contained in this report are judgments as of the date of this report, are subject to change without notice and are provided in good faith but without legal responsibility. This report is not an offer to sell or a solicitation of an offer to buy any securities. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may occur. Every province in Canada, state in the U.S. and most countries throughout the world have their own laws regulating the types of securities and other investment products which may be offered to their residents, as well as the process for doing so. As a result, any securities discussed in this report may not be eligible for sale in some jurisdictions. This report is not, and under no circumstances should be construed as, a solicitation to act as a securities broker or dealer in any jurisdiction by any person or company that is not legally permitted to carry on the business of a securities broker or dealer in that jurisdiction. Nothing in this report constitutes legal, accounting or tax advice or individually tailored investment advice.

This material is prepared for general circulation to clients, including clients who are affiliates of Royal Bank of Canada, and does not have regard to the particular circumstances or needs of any specific person who may read it. The investments or services contained in this report may not be suitable for you and it is recommended that you consult an independent investment advisor if you are in doubt about the suitability of such investments or services. To the full extent permitted by law neither Royal Bank of Canada nor any of its affiliates, nor any other person, accepts any liability whatsoever for any direct or consequential loss arising from any use of this report or the information contained herein. No matter contained in this document may be reproduced or copied by any means without the prior consent of Royal Bank of Canada.

Clients of United Kingdom companies may be entitled to compensation from the UK Financial Services Compensation Scheme if any of these entities cannot meet its obligations. This depends on the type of business and the circumstances of the claim. Most types of investment business are covered for up to a total of £85,000. The Channel Island subsidiaries are not covered by the UK Financial Services Compensation Scheme; the offices of Royal Bank of Canada (Channel Islands) Limited in Guernsey and Jersey are covered by the respective compensation schemes in these jurisdictions for deposit taking business only.

Kelly Bogdanova

Vice President, Portfolio Analyst
Portfolio Advisory Group – U.S.

Let’s connect

We want to talk about your financial future.

Related articles

Mission critical: Securing supply of critical minerals

Analysis 12 minute read
- Mission critical: Securing supply of critical minerals

Video: The de-dollarisation dilemma

Analysis 1 minute read
- Video: The de-dollarisation dilemma

China’s next act in a changing economic order

Analysis 18 minute read
- China’s next act in a changing economic order