london<u+2014>some big global investors worry that the broad slowdown in world trade and growing populist opposition to new trade agreements are undermining corporate profits and could be the next big drag on the stock market. u.s. equity prices have been supported for the past three decades by an acceleration of global trade and a freer flow of capital. those factors lifted economic growth and allowed companies to take advantage of new markets and economies of scale. the s&p 500 is up nearly ninefold since october 1986, according to factset. but now there is worry that the party is ending. <u+201c>we believe globalization has probably reached its peak,<u+201d> said marino valensise, head of the multiasset team at barings, a member of the massmutual financial group with $275 billion in assets under management. <u+201c>the market won<u+2019>t like it.<u+201d> barings<u+2019>s senior managers every winter gather at their central london office to iron out their 10-year investment forecast. at the next one, they expect to consider reducing<u+2014>or even outright eliminating<u+2014>their estimate of the value globalization adds to stocks, what they term a <u+201c>globalization premium.<u+201d> the barings managers say the slowdown in global trade is one factor leading them to move away from stocks that have benefited most from globalization and into places like bonds, which are in some cases better valued than the u.s. stock market and may suffer less amid rising geopolitical tensions. other investors favor switching from multinational companies to national champions like chinese internet companies or latin american airlines. global trade this year will grow at the slowest pace since 2007, according to the world trade organization, just as protectionist policies are on the rise and efforts to liberalize trade have stalled. the international monetary fund recently warned that anti-trade trends such as increases in tariffs could cause long-term damage to the world economy. some are worried this could spill over to corporate profits. global stock-index provider msci estimates that if policies such as trade protectionism and government deficit spending increase significantly in the developed world in the next two years, u.s. equities would shed more than 17%, while european equity markets would fall by close to 20%.<u+00a0>in a stress test run by msci, the firm assumes that such policies would lead to stagflation, a toxic combination of higher inflation and lower growth. over the past 12 months, the msci europe index is down 6.4%, while s&p 500 is up 4.9% michael o<u+2019>sullivan, chief investment officer for europe at credit suisse , said investors are facing a <u+201c>postglobalization<u+201d> landscape. <u+201c>for markets, the slowdown in globalization means even more uncertainty,<u+201d> he said. companies around the globe, from shippers to manufacturers, have already pointed to slowing trade and rising protectionism as a drag on profits. u.s.-based deere & co., the world<u+2019>s largest seller of tractors and harvesting combines, said earlier this year that protectionism and trade restrictions could hurt its results. in australia, ansell ltd. , one of the world<u+2019>s biggest makers of condoms, sees the rise of political risk clouding its long-term outlook. the u.k.<u+2019>s vote to exit the european union added <u+201c>an element of uncertainty in all of europe,<u+201d> chief executive magnus nicolin said on the company<u+2019>s latest earnings call. it wasn<u+2019>t supposed to be this way. equity valuations spiked in the early 1990s after the fall of the berlin wall ushered in the end of the cold war. world trade boomed, mcdonald<u+2019>s corp. started flipping more burgers in china and ford motor co. could manufacture pickup trucks cheaply in thailand. u.s. stock valuations jumped above their 120-year average on the assumption of ever increasing global trade and easier movement of goods, services and capital across borders, said christopher mahon, director of asset allocation research also on the multiasset team at barings. the globalization premium meant that u.s. stocks collectively traded at a price/earnings ratio roughly one whole number higher they otherwise would have, barings estimates. p/e ratios, calculated by dividing stock prices by earnings per share, are a common measure of how expensive shares are. barings calculated the premium by analyzing historical valuations and stripping out the impact of other variables such as inflation dynamics and central-bank policies. calculating the globalization premium is the result of extensive debate among senior investment strategists at the firm, who pore over economic data, forecasts and research reports before deciding on a number every year. but that equation is changing. over the past decade, barings has cut the premium by half, and the firm<u+2019>s outlook for stocks is going down with it. other fund managers say they are becoming more selective, shunning the sectors and countries they view as most likely to suffer from the resulting slowdown. <u+201c>globalization is increasingly coming under siege,<u+201d> said stefan scheurer, senior market strategist at allianz global investors. mr. o<u+2019>sullivan of credit suisse said the u.s. profit cycle correlates well with world trade. <u+201c>and in the past two years we had falling profits and slowing trade,<u+201d> he said. companies listed in the s&p 500 derive more than 30% of their revenue overseas, according to factset. global container-shipping operators have already cited the slowdown in trade as a major drag on profits, with the shipping industry facing its worst year since the 2008 financial crisis. the number of protectionist measures implemented around the globe so far this year has climbed to 338, according to researchers at global trade alert, the highest for the corresponding period since they began tracking the figure in 2009 and up from 61 in the same period that year. global trade alert is a trade-monitoring group coordinated by the centre for economic policy research, an independent research think tank based in london. efforts to liberalize world trade have also stalled, including the trans-atlantic trade and investment partnership, the potential free-trade deal between the u.s. and the european union. in the u.s., the peterson institute for international economics said the proposed trade policies of presidential candidates donald trump and hillary clinton would deeply hurt the american economy by slowing productivity growth. <u+201c>we<u+2019>re very concerned about the positions of both parties in trade,<u+201d> fred smith, chief executive at fedex corp. , said on the company<u+2019>s june earnings call. some investors argue that even as globalization may be on the decline in the west, pockets of the world continue to open themselves up for trade, creating new investment opportunities. sandra crowl at french asset manager carmignac points to argentina, for instance, as a country that may benefit more from opening itself up to the world even as other countries, such as the u.s., become more protectionist. at barings, managers favor moving away from equities and into fixed-income securities like bonds, which are likely to be more insulated from the turmoil. <u+201c>in march, i dare say we will be once again putting a haircut to our globalization premium,<u+201d> mr. mahon said. <u+201c>or possibly cut it to zero.<u+201d> write to riva gold at riva.gold@wsj.com and georgi kantchev at georgi.kantchev@wsj.com
stock prices under threat as global trade becomes a pariah  - wsj
riva gold georgi kantchev