The next generation of successful investors will likely look very different to what we see today. They will have to grapple with a complete rewiring of the global economy. Investment is fundamentally a bet on rising economic prosperity and managing uncertainties. For active investors, this also means betting on specific sectors and/or businesses – a tough ask in the face of increasing uncertainty.

Return of history

The peace-driven global order established after the world wars – which has defined geopolitics, trade, economics and investing – is ending. The last 80 years of this regime was led and held together by the USA, who are now walking away from it under the Trump administration. This administration is also actively undermining the very beliefs that underpinned it (closer cooperation and shared prosperity), and the institutions that enforced the regime.

The new order, what it will look like – and if any one country or one group of countries will dominate – is very uncertain. The last 80 years was an aberration, not the norm, and investors need to plan for a return of less recent history.

This means adopting a more zero-sum mentality where one nation’s prosperity is believed to sap another, even though theory and experience shows that should not be the case.

This “us vs them” mentality is leading to a more nationalist and imperialist approach to national and international policy in many countries, and a lack of coordination and coherence in how policy is made around the world. This is what matters the most – a shift in fundamental norms.

Old grievances

The new zero-sum mentality has not emerged in a vacuum. The experience of the last 80 years shows many benefits, especially in the education, urbanisation and industrialisation of many poorer nations that are enabled by globalisation.

It’s progress that has lifted billions of people out of poverty. The sheer breadth and scale of increased economic prosperity is unprecedented. But it has come with two key costs.

First, climate change – which is not the focus of this article, but an issue that investors will need to grapple with.

Second, the same forces that lifted billions out of poverty around the world did not improve inequality and poverty within richer countries.

While inequality between countries diminished, inequality within countries became entrenched … or worsened. If improving economic standards leave too many people behind, then their grievances against the current economic system are understandable and perhaps justified.

These are old grievances, renewed.

The experience of inequality within advanced economies follows a similar pattern. After WWII, inequality fell sharply with the widespread adoption of the welfare state and remained low until the 1970s. Then the neoliberal reforms of the 1970s and 1980s increased inequality – the hope was that after an initial increase, renewed economic dynamism would reduce inequality.

Unfortunately, inequality just became entrenched or rose.

Much of this inequality had a weird quality: many things became easier and cheaper (think phones, entertainment, fast food), but many of the basics became more expensive or rationed (think housing, health and fresh food).

The frivolities of life are now much more affordable, but the basics of life and dignity are not. For those less fortunate, this erodes peoples’ satisfaction with life, their trust in each other, their community and their institutions (like courts, politicians, and democracy). It’s a breakdown of social cohesion that moves us towards polarisation.

New Zealand is not immune. While not as polarised as the USA, recent comparison with Australia (in the Helen Clark Foundation Social Cohesion report) showed we are less cohesive than in Australia. The biggest fracturing is explained by the rich-poor divide, as well as political alliances, ethnicity and age. The more entrenched inequality and poverty become, the bigger the risks to the foundations of national economic prosperity.

Political events

The current polarisation in politics around the world can seem sudden, but is actually a slow rot that has been spreading for decades.

In the USA, polarisation of political views has been hardening for around two decades. The current tariff wars and attacks on American institutions by the Trump administration is a crystallisation of these long-running forces. It reflects other expressions of similar discontent, such as Brexit in 2020 and the current rise of the far right in Europe.

For investors, it is about understanding and adapting to immediate investment consequences of policy changes like tariffs.

It’s also a general step shift upwards of uncertainty and risk, because politics has become polarised. This leads to more frequent changes in governments, rapid implementation (and reversal) of unorthodox and less credible policies, institutions under attack to do the bidding of the government of the day, increasing civil and global conflict, ongoing fiscal pressures and a desperate lift in defence spending.

Keys to prosperity

What describes economic prosperity? Capital, labour and technology. These are the proximate drivers; that is, they describe and drive economic growth but do not explain why. So, what causes economic prosperity? Culture, institutions, geography and luck. Luck can’t be managed, but the others can.

Today we are observing a rejection of the previously seen closer economic and defence cooperation between countries. A large group of these countries had been reshaping geography, becoming the dominant geopolitical norm of the last 80 years.

This rejection is happening because of fraying social cohesion in many countries, which reflects changing culture in these nations. The resulting upheavals are changing the institutions who have upheld previous norms.

The future: uneven and unpredictable

It seems the three fundamental drivers of prosperity are less assured: geography, culture and institutions. The future need not be bleak, but progress from here is likely to be less predictable and more uneven.

For investors, this matters. The risks that were moderated in the last 80 years, will return with a vengeance, which means understanding new risks.

Importantly, there may be wild gyrations depending on political climate in and between countries, meaning the need to either be more aware and nimbler, or more disciplined at staying calm and investing with a long-term perspective. The critical qualities for investors in this environment will be humility and curiosity. T

Shamubeel Eaqub is chief economist and head of policy at Simplicity, and a thought leader who is unafraid to take a contrarian view.