Bigger, de-globalizing world may be hostile for investors

A number of the biggest stories for markets — from the United Kingdom elections last week to Greece's default drama to new opposition to the proposed Trans-Pacific Partnership (TPP) trade agreement — have de-globalization at their core.

De-globalization is the partial unwinding of the long-running shift to arrangements that allow capital, goods and services to move more freely.

A complex array of forces and interests in opposition to globalization has emerged since the financial crisis. They range from national governments seeking more control over the banks whose risks they insure to politicians and labor unions in richer nations arguing that globalization threatens the jobs and incomes of those in the middle while concentrating gains at the top.

Evidence that globalization is under fire is easy to find. Last week's election in Britain came embedded with twin threats: to British membership in the European Union and to Scotland remaining within the United Kingdom.

Britain's biggest bank, HSBC, said it may move its headquarters out of the country in the wake of "regulatory and structural reforms" imposed after the 2008 financial crisis. The bank also cited concern over whether Britain will stay in the E.U. Those reforms, which left Britain with some of the tightest banking regulations, were themselves a form of retreat from globalization, as would be leaving the E.U.

The wrangling between Greece and its eurozone partners over its debts may ultimately result in its exit from the single currency, a project that is partly predicated on the desire to capitalize on the forces of globalization.

Or consider the sudden run of play against the TPP in the United States. The idea of easier and growing trade as a force for good is central to globalization, whose backers believe that the economic growth trade brings can benefit all segments of an economy. An unusual coalition of left-of-center Democrats and right-wing Republicans has emerged to threaten the TPP, which would cover 40 percent of the global ­economy if President Obama can push it through. Opponents offer a variety of arguments depending on their orientation, notably fear that U.S. jobs and incomes will suffer because of heightened global ­competition.

Cross-border capital flows also have not returned to their pre-crisis peaks, an indicator that the world's financial system is less fully integrated. That's partly because that integration was a result of risk-taking now deemed unwise, and partly because of the kinds of regulations that concern HSBC. Countries now have better reason to erect gates around their financial systems. This is both to limit their own liability in the event of crisis, but also to better route funds toward their own ends and financing needs.

If globalization led to stronger growth but less-equal distribution of the proceeds, then de-globalization may well produce the reverse. That is, slower growth but more equal distribution may or may not be desirable, depending on your point of view. It almost certainly is not if you are an investor or financial market operator and want to maximize profits.

If the forces of de-globalization succeed, two implications for investors are easy to tab. First, growth will be lower, which will have a read-across to asset prices, very likely forcing them lower. As well, more equal distribution means lower corporate profit margins, which also will force asset values down.

Secondly, if the world's economies and markets become less tightly connected, they will become less tightly correlated. A capital market with higher ­barriers to entry will have a tendency to go its own way. That may improve the benefits of diversification.

De-globalization, if it happens, will be a slow, bumpy and, for investors, painful process.