As slowbalisation sets in, it’s time to adapt to a new age of domestic and regional trade, says Delfin Private Office managing partner, Annamaria Koerling
I spent the weekend with a group of German entrepreneurs recently, all of whom were deeply worried about the resilience of their country’s economy. One of them spoke about how there is already a flour shortage so bad that his local pizza baker had to tour the country to get enough flour to keep his business going. Another shared his concerns of power shortages and how his factory would take two to three years to re-establish the same quality of production if the power were switched off.
How did the mighty German economy end up here? The root cause seems to be a combination of poor domestic policy decisions, the war in Ukraine and sanctions against Russia which have disrupted what was perhaps an all too fragile ecosystem. (Spear’s has written about how this confluence of trends will impact single family offices.)
Germany is not the only country to have been wrong-footed. The economic turmoil caused by the pandemic alongside increasing geopolitical uncertainty has exposed vulnerabilities for many countries and companies. As governments focus on what former US treasury secretary Larry Summers has called ‘responsible nationalism’ and on shoring up their critical supply chains, investors are on high alert for the signs of ‘near-shoring’ or ‘reshoring’. Morgan Stanley argues that what we’re seeing today is merely the acceleration of trends that already existed. Data published by the World Bank shows that the global share of trade to GDP, a key measure of globalisation, peaked in 2008. The slow reversal of the globalisation of the late 20th and early 21st centuries reflects a growing desire to be less interconnected through global networks of capital flows, trade and technology. Dutch academic Adjiedj Bakas refers to this as ‘slowbalisation’.
What impact will slowbalisation have?
Under a slower economic growth regime, rising trade tensions will accelerate the trend to champion regional through-trade tariffs and the strengthening of regional links. This results in supply chains being brought closer to home. Research by Bear Stearns Companies (the investment bank that was reborn in 2019 after collapsing in 2008) also points to changes in consumer preferences, along with greater purchasing power in emerging markets, as significant contributors in boosting regional trade over global trade. Technology is exacerbating these trends by enabling leaner manufacturing methods and reducing the importance of low-cost labour. McKinsey data shows that more than 80 per cent of today’s global goods trade is not from a low-wage country to a high-wage country.
A greater focus on ESG is also an important contributor in the desire to shorten supply chains. An Oxford Economics paper argues that in the near term decoupling is likely to start with countries pursuing strategic and targeted measures to protect domestic sectors and limit economic ties. The paper argues that technological decoupling has already started in an effort to regain control of technology and protect data. There are many examples of this. The EU has led the way in protecting user data from social networks. Canada is the latest country to ban Huawei and ZTE in the interests of national security. The US has already restricted software exports to Russia, and US companies such as Amazon have added to this with self-imposed restrictions on new sales of software and services.
How will slowbalisation impact investors?
There are potentially serious implications for investments and portfolios. Any industries where technologies are sensitive and whose supply chains are globally diffused will be vulnerable to the disruption of global trade. Investors also need to note that it will take time and be very costly for countries to remodel economies and for companies to reconfigure supply chains. Meanwhile, this poses a threat to economic prosperity and corporate profit margins. On the flip side, there will be significant beneficiaries from ‘friend-shoring’ and localisation, not least because, as Morgan Stanley research points out, ‘all this geopolitical capex has to drive capital somewhere’.
This does not mean investing only locally in businesses that don’t rely on foreign markets, but does mean recognising that a new investment playbook is emerging. Countries and corporates will be seeking out allies rather than rivals to ensure supply chain security. Intensifying strategic competition between nations means that national security concerns may sometimes supersede economic logic. Morgan Stanley research points out that friendly trade partners with competitive wage costs will almost certainly benefit, albeit in varying degrees and ways. Mexico, India and Turkey are all possible net beneficiaries. Certain sectors, too, will benefit from a pick-up in demand driven by new supply chains. Examples could be defence, cyber-security, capital goods, metals and mining.
Slowbalisation will create unexpected winners and losers. This is uncharted territory, and in such an environment, diversification across themes and geographies will continue to provide a defence for investors dealing with the shifting sands of a new world order.
Edited by Chris Hawes
Image Credit: iXpert