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Trade troubles

This matters enormously for equity investors because there has for years been a close link between world trade growth and annual changes in the All-Share index. Since 1996 the correlation between the two has been a hefty 0.55 - and except for a period in 2002 when share prices fell as world trade recovered the two have moved almost in lockstep with each other.

One reason why world trade matters so much for equities was pointed out back in 1776 by Adam Smith. He began the Wealth of Nations with the claim that "the greatest improvement in the productive power of labour... seem to have been the effects of the division of labour". Slower growth in world trade betokens a slowdown in the progress of the international division of labour, which limits economic growth - and if growth expectations fall, so too should share prices. It's no accident that a slowdown in world trade growth has coincided with slower growth in western economies generally and with talk of secular stagnation. You only have to look at North Korea to see that a country that tries to be self-sufficient ends up dirt-poor.

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