Is globalisation going into reverse?
Is Globalisation just transitioning or going into reverse?
Much divided
A question mark hangs over where globalisation – the free flow of goods, services, people and ideas around the world – will go next. Although discussed long before the pandemic, a combination of Covid and Russia’s war on Ukraine has turbo-charged negative trends and the debate. Will globalisation go into reverse, or merely change its stripes? We speak to the Stock Pickers at Alliance Trust to find out.
1) What do we mean by globalisation?
Beginning in its industrialised modern form in the 19th century, globalisation refers to the interconnectedness of economies and cultures around the world through the flow of trade, capital, information and resources. By knitting the world ever-more tightly together, it has enabled businesses to access new markets, create more efficient supply chains, and produce goods and services more profitably.
2) What has been the evolution of globalisation?
As can be seen in the chart below, the state of globalisation has ebbed and flowed over the past 200-odd years.
Globalisation began in the early 19th century with the burgeoning Industrial Revolution. Over time, changes in technology and geopolitics led to a period of stagnation, before an eventual reversal into deglobalisation on account of two World Wars and a depression. What followed was a second, long period of increasing globalisation from the 50s onwards: Globalisation 2.0.
This continued all the way up to the Global Financial Crisis, at which point it seemed to peak and then stagnate for a while, before the pandemic came along with a fresh set of challenges for globalisation.
3) What has been the picture of globalisation in recent years?
In recent years, a series of short-term disruptions have unearthed or accelerated longer-term underlying trends that seem to be changing the state of globalisation. The Stock Pickers at Alliance Trust point to three in particular.
First, Covid exposed the fragility of global supply chains and their vulnerability to disruption, with Russia’s invasion of Ukraine adding energy security issues into the mix. It has pointed to a need to bolster operational resilience, by diversifying and reshoring supply chains of goods and energy.
Second, the intensifying geopolitical rivalry between the US and China has bubbled over into a trade war and exchange of protectionist policies, with other countries seeming to jump on the bandwagon. Alongside Russia’s invasion of Ukraine, it has accelerated the Balkanisation of global trade.
Third and finally, a gripe with globalisation has surfaced: while a source of tremendous productivity growth and wealth creation over the years, not everyone has benefited, or benefited equally. This has generated a political backlash against perceptions of wealth inequality, most notable in the Chinese Communist Party’s refocusing of economic policy away from growth towards “common prosperity” goals.
And yet, the degree to which we’re seeing deglobalisation or globalisation in a different form remains open to debate. Globalisation 3.0, perhaps?
4) Has there been/will there be any significant reshoring of supply chains?
Covid has certainly forced companies with global operations to rethink their overly complex supply chains, with the Alliance Trust Stock Pickers seeing efforts to near-shore – bring operations closer to home – and friend-shore – focus on countries seen as political allies.
For example, Alliance Trust Stock Picker, Sands Capital Management, is seeing businesses diversify their operations away from China, largely to the benefit of India. It points to chipmaker Foxconn, which builds materials in China and assembles them in India, but also has longer-term plans to manufacture chips in India and source more of the materials needed domestically.
In addition, following Russia’s invasion of Ukraine, energy security has been driven up the political agenda, boosting a long-term shift towards renewables, but also in some cases, reviving hydrocarbon production in order to create a more reliable short-term energy mix.
5) What could be the shorter versus longer-term economic impact of the transition?
In the short run, supply chain reshoring seems likely to add to costs, potentially leading to higher prices, significant shifts in the jobs market, and investment uncertainties. Following decades of expansion, profit margins may come under pressure, which means so could stock market returns.
Longer term, countries seem likely to cluster around geographical, economic, political, financial and trade links. As a result, diversified and reshored supply chains should increase investment in technology, buffer potential disruptions and lower climate impacts. However, this will also likely reduce manufacturing efficiencies and, alongside ageing populations, lower economic growth.
6) How might inflation and interest rates be affected?
Alliance Trust’s Stock Pickers believe that as companies reshore their supply chains and nations exert greater control over their resources, the impact is likely to be inflationary. What’s more, as China reprioritises its economic goals, it will probably cease to be the economic growth powerhouse of yester-decade and the major disinflationary force it has been in the past.
As a result, central banks may need to maintain higher interest rates, in order to keep economies in line with their inflation targets, which means debt will “matter” to people, companies and countries again, following more than a decade of extremely low interest rates.
That said, over the long term, companies may seek to lower costs by investing in automation, which may reduce pricing pressures.
7) How do you invest in an era of Globalisation 3.0?
Broadly, Alliance Trust’s Stock Pickers make the case for needing an active, manager-led approach, if portfolios are to successfully navigate the challenges driven by changes to globalisation in a world of more persistent inflation, lower growth and rising geopolitical risk. This is particularly true, given that stock markets are likely to become increasingly split between winners and losers.
Stock Picker, Sustainable Growth Advisers, has been adjusting its portfolio valuations for lower growth, and purging the portfolio of businesses where growth is less predictable – replacing them with companies with strong pricing power and greater resilience to an economic slowdown.
Sands has been seeking businesses benefiting from domestic demand rather than external trade, believing that it is more predictable, less susceptible to exogenous factors, and often underpinned by longer-term growth trends.
Lyrical Asset Management has been investing in higher-quality businesses with strong returns on their projects, that can adapt to different environments, are resilient, require less capital, and have local market advantages that make them less susceptible to changes in globalisation.
Finally, Black Creek Investment Management is seeking businesses that are market leaders with strong underlying business fundamentals, including their ability to grow future cash flows and earnings, and that are trading on attractive valuations.
Marcus de Silva is a Freelance Investment Writer.
This information is for informational purposes only and should not be considered investment advice. Past performance is not a reliable indicator of future returns. The views expressed are the opinion of Towers Watson Investment Management (TWIM), the authorised Alternative Investment Fund Manager of Alliance Trust PLC, and are not intended as a forecast, a guarantee of future results, investment recommendations or an offer to buy or sell any securities. The views expressed were current as at August 2023 and are subject to change. Past performance is not indicative of future results. A company’s fundamentals or earnings growth is no guarantee that its share price will increase. You should not assume that any investment is or will be profitable. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.
TWIM is authorised and regulated by the Financial Conduct Authority. Alliance Trust PLC is listed on the London Stock Exchange and is registered in Scotland No SC1731. Registered office: River Court, 5 West Victoria Dock Road, Dundee DD1 3JT. Alliance Trust PLC is not authorised and regulated by the Financial Conduct Authority and gives no financial or investment advice.