‘Paradigm shift’ has become a massively overused term. Even the man who coined it, American philosopher of science Thomas Kuhn, eventually grew so tired of its ubiquity that he practically disowned the phrase.
Despite his protests, this tired trope is still used to describe pretty much any situation defined by dramatic change. In the parlance of Kuhn’s seminal work, The Structure of Scientific Revolutions, it denotes the point at which conventional thought is abandoned.
As investors, with due apologies to the concept’s originator, we might usefully ask whether a paradigm shift has occurred in the sphere of geopolitics – or at least whether one is imminent. There are certainly plenty of very knowledgeable people who believe this is the case.
For example, I recently attended a speech by Baron Hague of Richmond – perhaps better known as William Hague, former leader of the Conservative Party and currently the chancellor of the University of Oxford. He suggested that the world is entering a new chapter and that stock selection and portfolio management may have to reflect this emerging reality.
It could be argued that such a turn of events has been in prospect for some years. On balance, having enjoyed a ‘golden age’ between the fall of the Berlin Wall and the onset of the global financial crisis, globalisation has been in retreat for almost a decade.
Donald Trump’s first period in office hastened this trajectory. The impacts of the Covid-19 pandemic brought further fragmentation. Trump’s return to the White House has once again accelerated the transition.
One possible outcome is bipolarity, with the US and China representing the undisputed superpowers around which other nations gather. But maybe more likely is a regionalised, multipolar system in which trade and investment must co-exist with geopolitical rivalry.
As the co-manager of a fund that specialises in Asian smaller companies, I could devote an awful lot of time to wondering if this would constitute a genuine paradigm shift – sorry again, Professor Kuhn – and whether our investment ethos should also undergo some sort of revolution. But I think the lie of the land can be summed up relatively quickly.
In my opinion, this really boils down to the age-old debate over the respective merits of top-down and bottom-up stock-picking. If a genuinely momentous transformation is under way – or if we should expect one soon enough – is it macro or micro considerations that ought to guide our investment decisions?
Combining top-down and bottom-up approaches
It is hard to dispute that a region or country’s global standing is a more significant piece of the investment puzzle today than it has been for some while. Amid increasing signs of isolationism, not to mention conflict, the bigger picture obviously matters.
However, the relationship between geopolitics and microeconomics is not always clear-cut. Regions or countries that might lack manifest investment appeal when perceived as a whole can still be home to individual companies capable of delivering long-term growth and solid risk-adjusted returns.
Take China. Despite a welcome thaw in its dealings with the US, it remains a no-go area in the eyes of many investors. The at-a-glance conclusion is that it is nigh on uninvestable due to the government’s aversion to capitalism.
Yet China has been extremely supportive of entrepreneurship and innovation. It has introduced various stimulus measures, is openly encouraging businesses to strive for the cutting edge and has made plain that success is nowadays likely to be celebrated rather than punished.
Crucially, China has also shown it should no longer be regarded merely as a ‘fast follower’ that is capable only of rapid-fire imitation. Even Trump admitted the launch earlier this year of artificial intelligence (AI) chatbot DeepSeek served as a “wake-up call” for anyone convinced the US’s tech supremacy would forever remain unchallenged.
This is why it can pay to dig deeper. The macro environment might provide a valuable framework for gauging investment opportunities but our experience is that scrutiny at the micro level is key to unearthing the gems hidden away in relatively unfamiliar markets.
In other words, every business should be assessed on its own unique merits. Local knowledge, in-depth research, direct engagement and a truly granular approach to choosing the most promising stocks can all enhance this process.
Most of the companies in which we invest in are domestically focused and operate in high-growth sectors or industries. Looking beyond the bigger picture enables us to better determine the many instances in which global events have little or no effect on these businesses – or, better still, the instances in which their attractions are somehow enhanced.
It may well be that a paradigm shift in the geopolitical and geo-economic order is in the offing or already playing out. In my view, though, there is no need to radically disrupt the long-established art and science of drawing on expert, on-the-ground insight to construct sensibly diversified equity portfolios.
Gabriel Sacks is co-manager of abrdn Asia Focus. The views expressed above should not be taken as investment advice.