By Saker Nusseibeh CBE, Founder of 300 Club and CEO, Federated Hermes Limited
In rereading the “Why” paper, a 300 Club paper I published in 2017, I was struck by the fact that I and the readers shared a common assumption – that the view of the world that Adam Smith described was a reflection of economic reality.
I argued in that paper that looking at the ‘Wealth of Nations’ without first reading his ‘The Theory of Moral Sentiments’ risked completely misunderstanding how Smith saw the functioning of business activity. That in ‘The Theory of Moral Sentiments’, Smith posited a view that a rational person would combine their self-interest with a care for the wider community in which they lived, because they saw an interdependence between their well being and that of society at large.
The specialisation of resources that Smith envisioned in his ‘Wealth of Nations’ was, by definition, based on the assumptions made in Moral Sentiments, namely that in human commerce one can arrive at a situation when both parties in economic interactions can benefit from any such interaction equally and that all parties work to protect what today we might call the ecosystem in which they operated.
Otherwise, individuals and, on a grander scale, nations cannot trust the other sufficiently to build a web of interdependence which inherently, carries a risk of vulnerability. In other words, Smith was the original propagator of what we might term a win/win doctrine within a system where everyone abhorred injustice and strived to work collectively to preserve the society in which they lived2.
That Smith saw the world in this light is no surprise, for he was a product of the 18th Century Edinburgh enlightenment, but we tend to forget that his view, particularly his foundational world view in ‘The Theory of Moral Sentiment’ was not an accepted view until, I would argue,1945. The prevalent world view that defined the commercial and political interactions of the western world at the time of Smith and post his publication, was essentially a Mercantilist view.
The post-1945 system — shaped primarily by the United States, and to a lesser extent the UK — embodied that principle of self-interest coexisting with the preservation of the ecosystem and mutual benefit from trade. Institutions such as the IMF, the World Bank, and the GATT (later the WTO) were not simply bureaucratic mechanisms; they were expressions of faith based on an abhorrence of the human cost of WW2, not just in Europe but in China and Asia also.
One could argue that the impetus for this extraordinary move was two-fold; up to 1992 it presented a kinder face of capitalism in contrast to Soviet communism. And from 1992 it bound the ex-Soviet Union and China closer to the western world. In both cases it served the interests of and benefited the United States. However, globally, the result was extraordinary: global GDP multiplied and billions were lifted from poverty.
That, in turn, allowed normal corporate and business discourse to explore themes that reflected the view expounded in Moral Philosophy. Companies talked of social responsibility, of inclusion, of diversity and so on. And, as they did so, they found anecdotal evidence of commercial benefit, just as Smith had suspected.
Diversity allowed companies to access a wider pool of talent and perspective, purpose engendered employee loyalty, increasing productivity and acting responsibly reduced government and regulatory risk. The trend to accept this perspective was such that Milton Friedman’s essay in 19703 seemed a crass anomaly, while in fact it simply reflected the world pre-1945. By the time most of the scientific community had come to grips with the dangers of global warming, Smith’s assertion that rational people will work together to protect their ecosystem found an echo in governments and civil society’s efforts to try to mitigate that risk.
It was in this atmosphere, in 2017, that the ‘Why’ paper was written and the subsequent discussions about sustainability, both for and against responsible business practices, took place. In all probability, most practitioners of my generation in finance thought that Friedman’s view was the aberration, and not the historical norm.
However, it is becoming clear that President Trump, and many of his policymakers, believe the post WW2 world order, created by the US and which served US interests for a long time, no longer serves US interests. One could postulate that given the economic and technological superiority of the US, President Trump might see the attractions of reinstating a 19th century world order in which the US (as opposed to Great Britain) is the main beneficiary and where economic and technological lead results, not in mutual economic growth and benefit, but as was the case in the 19th century in the siphoning off of economic resources from the weaker party to the stronger party.
In that context, ‘Liberation Day’ is not about tariffs or US industry, but a rejection of an economic world view. Of course, it is perfectly within his gift as leader of the US (and logical from a US perspective) for him to do so.
The difference with the 19th century is twofold. First, the positive effects of the post 1945 world order are so manifest and obvious that the developing world has accepted its benefit to them. Secondly, there is a block of opinion within the more liberal part of the western world (UK, Australia, Europe and Canada) that feels ideologically wedded to the new world order and that view permeates their corporate structure as well.
We can see evidence of both these points in the push back to the new US policies in Europe on a governmental and corporate level and in the developing world and China.
Practically speaking this implies not that the global order shatters post liberation day, but rather that it breaks up into three blocs; The US, the Liberal bloc and the Chinese bloc which incorporates the developing world.
The return of mercantilism is not merely an economic shift; it is an intellectual one. The liberal order was grounded in trust — that open exchange could create mutual advantage.
The mercantilist order is grounded in suspicion — that every gain must come at another’s expense.
The implications are profound. Global supply chains will shorten. Strategic industries will “onshore.” Capital will flow where governments direct it, not where markets reward it. Diplomacy will increasingly resemble deal-making rather than consensus-build. The world is choosing between the invisible hand and the iron fist — between the economics of trust and the politics of power.
So what does this mean for investors?
The size of both the US and China economies is bound to increase the imperative for the European countries to act even more as a single bloc. Each single European country is incapable of withstanding a more aggressive mercantilist policy from the USA on its own, but in concert they can protect their combined interests better. In all probability, the UK, Australia and Canada would also work closely with this bloc, partly because of shared beliefs in open markets and common good, and partly because each would be too small to withstand the two larger economies on their own.
They would also increase their spending on defence because it has become clearer that, with a singular exception, the United States cannot be relied upon to support its allies in times of peril. Defence spending in general leads to technological advancement. Hitherto, the Europeans were content for the US to bear the brunt of defence spending and reap the majority of the technological rewards but, as European defence spending increases, more technological innovation will come out of Europe. Additionally, the European liberal bloc with its lack of secure energy supplies will likely increase its research and development of alternative energy.
By the time liberation day was announced, China was well on its way to establishing itself an indispensable partner to developing countries building up trade with them to lessen its dependence on US trade, and deepening its political influence over them with an alternative vision that extols centralist control, long term planning and economic growth – but without the trappings of democracy. It will probably argue to the developing world that Liberation Day signalled the failure of the post 1945 model under US leadership which then opens the path for an alternative ‘global’ open market policy with Chinese characteristics. China is already well advanced in alternative energy development and seems to have caught up in the development of AI.
Finally, The US is probably on the cusp of even greater economic growth as it utilises its technological and political clout to further advantage itself versus the rest of the world, secure in its near self-sufficiency in all vital resources, particularly energy, water and food. As it turns inwards, its commercial developments will rely on its large internal market rather than the external market which it will occasionally access. This isolationist policy is not harmful, per se, but will affect the kind of products that are developed. Think of EVs dominating the world outside the US and petrol cars dominating the US market, for example.
Investors are, therefore, faced for the first time in a long time with a world which does not move more or less in sync. As economic cycles become less correlated, asset allocation (including currency allocation) will probably return as a source of performance differentiation. Making general global index bets will therefore not be as efficient in creating value as making judgements as to where each separate economic cycle is going. In the past, I have said that using index funds is simply a way of betting red or black on a roulette table, this new situation will mean that there will be at least three roulette tables playing at the same time.
For active stock pickers, the world I grew up in where one looked at dominant global technologies and global leaders (still very much in evidence as I write with the Magnificent Seven) will more than likely change to become more about local leaders and local trends. Again, the application of index fund methodology will likely be a less effective way to generate excess returns consistently in such a divided and more volatile environment.
However, the breakdown of global interdependence will not necessarily mean the end of what one might term sustainable business practices. Businesses in all three blocs and in the developing world will try to attract talent from different sectors of its society and from elsewhere, so diversity will remain.
Companies will continue to treat their human capital in a way that enhances productivity and so ‘enlightened’ labour practices will continue because they are the most economically and financially efficient (remember it was the union hating extreme right wing Mr Ford who popularised the two day paid weekend for his workers because it lessened mistakes on his production line and allowed workers the leisure time to buy his products). And in all three blocs, corporates will take care to find acceptance from their client base and to get along with their regulators. In other words, sustainable or responsible business practice will continue because they make commercial sense although in some locations we might see less of the more religious fervour rhetoric around very minor parts of it.
From an ownership perspective shareholders will continue to try to protect their assets through governance mechanisms and, where they have the ability to do so, to nudge the companies they own towards long term consideration through stewardship and engagement. When the Muscovy Company was established in 1555 as the first joint stock company, the investors agreed to hand day-to-day control to the executive, but never acquiesced to the view that they have no ownership rights to safeguard their assets and only a right to reap dividends
Finally, whatever one thinks of global warming, the world is moving to alternative energy (not least because of the massive increase in demand from data centres) and many countries are already thinking of technologies to mitigate the effects of changing weather patterns on their population. Investors will realise that this secular trend is a rich seam to tap into for years to come. As an example, we can already see the dominance of Chinese EVs in developing markets.
The re-emergence of a fragmented global order has brought with it a renewed emphasis on asset allocation as a source of performance differentiation. As economic cycles decouple and geopolitical blocs assert different priorities, the old assumption of global synchronisation no longer holds.
Investors must now navigate a world where general index exposure resembles betting across multiple roulette tables, each spinning to its own rhythm. Currency, geography, and sectoral nuance matter again. Not as noise, but as signals.
Active management finds fresh relevance in a world shaped by local dynamics and regional leadership. The investors lens must now adjust. Not to abandon global thinking, but to refine it through the prism of local context. Just as Smith saw rational actors working within and for their ecosystems, companies across blocs will continue to pursue sustainable practices, not out of moral obligation, but because they are commercially sound practices. In this new world, those who embrace complexity and seek understanding rather than simplicity, will be best placed to preserve and grow capital in a world that no longer moves as one.
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[1] https://www.hermes-investment.com/uk/en/intermediary/insights/active-esg/the-why-question/
[2] Dwyer, John. “Ethics and Economics: Bridging Adam Smith’s Theory of Moral Sentiments and Wealth of Nations.” Journal of British Studies 44, no. 4 (October 2005): 662–687. https://www.jstor.org/stable/10.1086/431936.
[3] Milton Friedman. “The Social Responsibility of Business Is to Increase Its Profits.” The New York Times Magazine, September 13, 1970, pp. 122–126. https://public.websites.umich.edu/~thecore/doc/Friedman.pdf
