World trade may be in the doldrums but global capital flows have suffered even more since the 2008 financial crisis.
This is according to analysts at UBS, who think it may lead to a “global war for capital,” where countries with strong domestic funding win and those depending on foreign investment lose.
Here’s UBS’s Paul Donovan and Sophie Constable:
The globalisation of capital flows were as much a feature of the post-1995 environment as were the globalisation of trade flows.
Global capital flows shrank significantly in the wake of the global financial crisis, and have not subsequently recovered in the way that global trade has recovered.
Here’s the chart:
There are a few good reasons for this, according to UBS.
Financial regulation has prioritised keeping pools of capital in within national borders after banks and investors got burned in risky international deals they didn’t understand in the 2008 financial crisis.
There’s also been an increase in political risk, which makes markets unpredictable and discourages international investors. Here’s UBS again (emphasis ours):
Economic pressures may be local but economic principles are generally universal. Political risks are, however, far more parochial in their nature. Understanding political risk requires a greater investment in time and resources than does understanding economic risk. As political risks rise investors are likely to keep money closer to home (where familiarity breeds reassurance).
So, why does this matter? Well, countries that don’t have to rely on international investors to fund economic expansion will do better than those that do, according to UBS:
There is a war for capital coming: International capital is harder to come by. Countries without sufficient domestic capital will have to fight to finance their current account deficits, especially if they are unattractive locations for real world direct investment.
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