The consensus is wrong
AI is a distraction. The real money is moving through the cracks of a breaking world order. While retail investors chase the latest silicon valley hype, institutional giants are quietly repositioning for a decade of fiscal dominance. BlackRock Investment Institute recently flagged a shift that the broader market is failing to price correctly. They call it a megaforce. I call it the end of the globalist peace dividend. Geopolitical fragmentation is no longer a tail risk. It is the primary engine of equity returns in markets that were once considered stagnant.
Japan and Europe are the current beneficiaries. This is not a coincidence. It is the result of a deliberate pivot toward looser fiscal policy. Governments are spending money they do not have to build walls they do not need. This creates a specific type of inflationary pressure that benefits domestic champions over global conglomerates. Per recent data from Bloomberg, the divergence between fiscal spending in the G7 and traditional monetary tightening has reached a breaking point.
The Japanese Renaissance
The Yen is a weapon. For decades, Tokyo fought deflation with a blunt instrument. Now, they are using fiscal fragmentation to rewrite their corporate DNA. The Tokyo Stock Exchange is forcing companies to care about shareholders. This is a structural revolution disguised as a regulatory update. When Roelof Salomons of BlackRock points to Japan, he is looking at the intersection of corporate governance and massive government subsidies for domestic semiconductor fabrication.
Capital is flowing back. Foreign investors are no longer using Japan as a low-interest carry trade source. They are buying the Nikkei because it represents a hedge against a failing US-China trade relationship. The technical mechanism is simple. As the world fragments, Japan becomes the preferred high-tech manufacturing hub for the Western alliance. This shift is funded by a fiscal deficit that would make a central banker from the 1990s weep. But in 2026, deficits are the fuel for the new industrial policy.
Europe and the War Economy
Brussels has finally found its checkbook. The era of German-imposed austerity is dead. It was killed by the necessity of defense and the urgency of the energy transition. Europe is now operating under a de facto war economy. This requires massive state intervention. This intervention translates to guaranteed contracts for industrial giants. According to reports from Reuters, European defense spending has seen its sharpest year-over-year increase since the mid-20th century.
Fragmentation is the catalyst. When global supply chains break, local production must be subsidized. The Euro Stoxx 50 is no longer a collection of tired banks and luxury brands. It is becoming a play on the re-industrialization of the continent. The fiscal loosening mentioned by BlackRock is not about social safety nets. It is about strategic autonomy. This is a high-conviction trade for those who understand that the globalized ‘just-in-time’ model has been replaced by ‘just-in-case’ stockpiling.
Regional Equity Performance YTD (February 2026)
Technical Breakout of Fiscal Multipliers
Traditional economics suggests that high debt loads stifle growth. The current market reality refutes this. In a fragmented world, the fiscal multiplier is higher because the spending is hyper-local. When the Japanese government subsidizes a factory in Kumamoto, the secondary and tertiary economic effects remain within the domestic ecosystem. This prevents the ‘leakage’ of capital that occurs in a globalized economy.
The following table illustrates the shift in fiscal priorities across major regions as of late February. These figures represent the percentage of GDP allocated to industrial and defense subsidies, a core component of the ‘fragmentation’ trade.
| Region | Industrial Subsidies (% of GDP) | Defense Spending Growth (YoY) | Fiscal Stance |
|---|---|---|---|
| Japan | 3.2% | 7.1% | Expansionary |
| European Union | 2.8% | 11.4% | Expansionary |
| United States | 2.1% | 4.5% | Contested |
| China | 4.5% | 6.8% | Strategic |
The Geopolitical Premium
Risk is being repriced. For thirty years, the market applied a ‘geopolitical discount’ to companies with heavy state involvement. Today, that has flipped into a ‘geopolitical premium.’ Investors are paying more for companies that are aligned with national security interests. This is the ‘megaforce’ BlackRock is signaling. It is not just about who has the best AI. It is about whose AI is protected by national borders and funded by national treasuries.
The fragmentation of the global financial system is also driving a return to hard assets and localized manufacturing. This is why the returns in Japan and Europe are outstripping the tech-heavy indices of North America. The market is realizing that a software company in Palo Alto is more vulnerable to a broken supply chain than a ball-bearing manufacturer in Bavaria or a robotics firm in Osaka. The physical world is reasserting its dominance over the digital one.
Watch the upcoming March 15th policy meeting of the Bank of Japan. The rhetoric regarding the ‘fiscal-monetary nexus’ will be the next major data point. If the BoJ signals a continued tolerance for higher inflation in exchange for industrial growth, the Japanese equity rally has significant room to run. The fragmentation trade is only in its second inning.
