With Europe in the grip of a massive debt crisis, U.S. unemployment still near double digits and global markets roiling on what seems an unending roller-coaster ride, the impact from the 2008 financial meltdown has been nothing if not severe.
But many investors and wealth managers continue to operate under the assumption that, sooner or later, order will be restored and things will go back to the way they were.
To them, Ian Bremmer has a stark message: Think again.
"I think we're saying something fairly new to the Street, which is the world order has changed. It's not changed a little bit -- it's changed for good," Bremmer, president of the Eurasia Group, told reporters on a conference call to present the findings of a new white paper advancing the thesis that the global economy has taken a sharp, irrevocable turn, with volatility the new normal for the foreseeable future.
Bremmer co-wrote the paper, entitled "New World, New Rules," with Lisa Shalett, the chief investment officer at Merrill Lynch Global Wealth Management.
For investors, Merrill's emphatic message is diversification, with a particular focus on emerging global markets.
"We have to build portfolios in every asset class that are more global than ever before," Shalett said.
But diversification, she argued, must assume a new meaning in the investment world that pairs with the fundamental economic transformations that has eroded the exceptionalism with which U.S. assets have been viewed for decades. According to Shalett, the average investor's portfolio has just 8% exposure to non-U.S. equities, and only 3% exposure to equities in emerging markets. Those figures could be doubled or even tripled and they still would be proportionally underrepresented.
"In the old paradigm, we might think that a portfolio that had a lot of stocks was diversified," Shalett said. "But what we're talking about is really opening your mind to where all the growth in the world is."
The authors' contention that the world is in the midst of a dramatic economic and geopolitical restructuring is rooted in the notion that the era of western hegemony is in its final throes. For evidence they look to the weakening of the U.S. dollar, the heavy indebtedness (as measured by debt-to-GDP ratio) of the United States and the Eurozone, as well the waning influence of western-dominated global institutions such as the World Bank and International Monetary Fund.
"For the last 40 years, globalization has been driven by the West," Bremmer said. "That world is over. There've been many shocks that have hit the world over the last decade," he continued, noting the adjustment to the post-Soviet era, the crisis in Asian markets and the Sept. 11 attacks. "None of them changed the fundamental architecture of the world. The 2008 financial crisis did."
Borrowing a term from economist Joseph Schumpeter, Bremmer described the current era as one of "creative destruction," looking ahead to "a heightened level of volatility" punctuated by more market shocks.
The discussion of emerging markets often begins with China, and, too often, the authors contend, that's where it ends. But in crafting an investment strategy for a new global equilibrium, they urge investors to consider other so-called BRIC countries, Brazil and India, along with more nascent and less-discussed markets, such as Indonesia, Turkey or even Nigeria.
They also suggest that a new global economic dichotomy may be emerging to supplant the conventional divide between "developed" and "emerging" markets: that of debtor and creditor nations. That many western nations are beset by rising debt ratios has caused many to turn inward to deal with internal affairs such as high unemployment and, in some European states, the specter of fiscal insolvency while being tagged with credit downgrades.
Bremmer and Shalett argue that investors need to move in the opposite direction, particularly in a time of extreme volatility, to diversify their portfolios with an increasing exposure to foreign markets.
"As nations become more insular, investors, understandably, may be tempted to do the same," they wrote in their white paper. "Yet while that might seem a more conservative approach, the insularity of nations actually compels investors to look ever outward, not just to different countries but also to new and different asset classes that they might not have considered before."
Along with a diversified array of country and asset holdings, the volatility of the global markets, showing no signs of abating, might also call for a shift in the traditional cadence of the financial advisor.
"In a volatile world, your portfolio drifts from your long-term strategic asset allocation," Shalett said, suggesting that investors consider consulting with an advisor to rebalance their portfolios twice or even three times a year.
"We're trying to work with all of our advisors to provide them with the tools, with the products, with the solutions to help have those conversations with clients, again all starting from the perspective of what are you trying to achieve and how can we get there from here," she said.
The ongoing "dislocations" the authors forecast in the near future take on a special significance for the ranks of baby boomers headed for retirement over the next decade.
While they foresee a landscape marked by eroding western hegemony and rising economic parity in emerging nations that together call for a more diversified approach to investing -- both by asset class and geography -- they are urging investors and advisors not to take their warning as a call to abandon U.S. investments.
Indeed, in their paper, Bremmer and Shalett point out that the United States still accounts for as much annual output as Japan, China and Germany -- the next three largest economies -- combined. But the fact that 40% of the profits that S&P 500 companies realized last year came from overseas argues for a balanced approach, and draws a trend line highlighting the growing importance of exposure to emerging markets.
"I think it's really just a question of saying, is that your only pathway forward? Because it may not be enough," Shalett said of a U.S.-centric investment strategy. "What we're saying is yes you still want to have those U.S. exposures, you just don't want to have them be 100% of your exposure."
