Deglobalisation – What does it mean for international share markets?
Rising inequality, supply chain risk and geo-political distrust have brought the decades-long march of globalisation to a halt. Deglobalisation is now creating winners and losers amongst firms doing business across borders. This has big implications for global equity investors.
“Globalisation in the aggregate generates wealth, no question. But it gets concentrated.”-
Tim Ryan, former Member of the US House of Representatives
The rise and fall of globalisation
Globalisation refers to the increasing interdependence of the world’s economies as the importance of national borders diminishes.
The period between 1945 and the 2008 global financial crisis (GFC) saw increasing globalisation, leading to rising global income. However, the gains from trade were highly concentrated, bringing rising income and wealth inequality, especially within developed economies. Lower skill manufacturing processes shifted to lower-cost regions, while skilled migration to higher wage economies placed downward pressure on wages.
This benefitted high skilled workers exposed to the scale benefits that globalisation brought. However, lower skilled workers in developed economies experienced diminished incomes and rising economic insecurity.
What are the forces now driving deglobalisation?
Rising inequality brought popular disillusion with globalisation, contributing to Brexit, import tariffs and hostility towards migration. Several factors are now accelerating this reversal of globalisation.
Increasing trade tensions with China and the pandemic showed that minimising input costs could negatively impact supply chain resilience. Governments subsequently encouraged the sourcing of essential medical supplies and key components such as advanced semiconductors either from home markets or dependable neighbours.
Moreover, spending in developed economies is switching from goods to services, which tends to be domestically orientated. Economies such as the US import far fewer services than goods from China, accelerating the shift in trade.
What does deglobalisation mean for the global economy?
The global economy is showing signs of what has been called ‘The Great Separation’ as the world divides into blocs centred around the US and China. Businesses in developed markets must increasingly negotiate a complex web of rules regarding exports, sourcing of key components and worker movement.
Chinese companies face higher tariffs and more demanding rules of origin when exporting to the west. These may become more severe after this year’s US presidential election. Technology groups face stricter controls on the transfer of data and even exclusion from critical infrastructure. Chinese firms dependent on finance raised in developed markets may find this increasingly challenging to access.
However, decoupling will also bring measures which support certain industries. Recent US legislation to safeguard supply chains gives support to domestic and overseas companies manufacturing locally.
What should global equity investors consider now?
The forces driving deglobalisation are long-term trends, with long-term impacts on equity markets. Navigating this environment requires prudent risk management.
Investors should consider how earnings of companies based or manufacturing in one block but selling into the other would be vulnerable if market access were interrupted at short notice.
Deglobalisation represents a supply chain risk, so investors should think carefully about businesses which depend on the unrestricted flow of key raw materials and components across trading blocks.
However, deglobalisation brings some exciting opportunities as well as risks. Geopolitical tensions and supply chain disruption have led the US, EU and Japan to incentivise the reshoring of critical manufacturing. Companies in semiconductor, clean energy, electric vehicle and key medical products supply chains stand to benefit from a wave of innovation, capital investment, government support and market protection.
Axiom Investors, who manage the Pengana Axiom International Funds focus on deglobalisation as one of four distinct structural themes. Changing trade patterns catalyse growth in distinct pockets of the economy, creating opportunities for astute investors who know what to look for and where to find them. Axiom’s data driven process provides unique insights which deliver a deep understanding of how supply chains are structurally changing. It then identifies companies that are aligning to these shifts to deliver sustainable earnings growth.
One example is its holding in pharmaceutical company Novo Nordisk whose primary manufacturing plants and key suppliers are located in Europe and the US, however a local facility meets demand in China.
Axiom also invests in Taiwan-based semiconductor manufacturer TSMC, which is building a new US$40 billion semiconductor fabrication plant (or fab) in Phoenix, Arizona. This benefits from significant support provided by the Biden Administration’s Chips and Science Act.
Please click here to read the second in our series of four articles which delve into each of the “4 D’s” – the key structural trends driving long-term equity returns – the next article on disruptive innovation investigates how technological advances and innovative business models are transforming markets.
Tim Richardson CFA, Investment Specialist
