Is globalisation dying? The risks and opportunities for UK investors
We only need to look at China to see it’s a huge international growth story but for Steve Clayton, manager of the HL Select fund, geo-political events mean it is re-looking at this emerging market area.
Clayton says: “Action from the government in the recent quarter show that politics is taking the upper hand in guiding policy. It is prepared to push down on corporate sectors and make them change behaviours to suit the Chinese political market.”
He says this is impacting the way it looks at opportunities in stocks like Tencent where market availability is subject to “Beijing’s discretion and timing” which is a “complicating factor for us”.
Clayton adds that when thinking about the broader impact of the pandemic, it revealed just how dependent a lot of the world has become on interconnectivity between nations’ supply chains which used to be local but are now global.
He says: “You are dependent on the smooth functioning of the system, and we’ve had a lot of talk about reshoring which is potentially a big shift. It redefines the distribution of manufacturing and creates a whole series of opportunities if companies do follow the combination of China getting firm with companies and the possibility of future pandemics which makes the reliance on global production more risky than perhaps people thought.”
He adds that he believes we are going to see changes that will create opportunities – and also risks – for those who have overcommitted businesses to the dependence of a “smoothly functioning world”.
‘Globalisation is dying’
For James Thomson, manager of the Rathbone Global Opportunities fund, he thinks globalisation is dying.
“I think the impact of the Russian invasion has illustrated to the world how dependent we are in energy security, and the zero Covid impact in China is showing the danger of supply chain issues so we will see big reshoring for energy security but for the semiconductor sector as well,” he says.
He adds there’s potential for “quite a significant investment theme taking us forth from here”, and it is part of the reason why he has taken his US weighting to its highest level in history.
This stands at 67% as at the end of April which was reached in the last few weeks after Thomson bought Apple, along with the outperformance of the US dollar and US stocks.
Thomson says: “The US is a classic market – it’s expensive but it’s not overvalued. It has one of the highest price to earnings (PE) markets in the world – 17, though down from 23 but I think you get what you pay for as that’s where the reliable growth is.”
He adds that US companies are growing profits four times faster than the rest of the developed world so it is “deserving of this premium, especially in a world which is increasingly unreliable in terms of delivery of profits”.
‘Country risk premium is back’
While Thomson highly regards the developed US market, Jacob de Tusch-Lec, manager of Artemis Global Income fund is excited about the likes of Brazil and Mexico, as well as smaller countries including Israel and Denmark “which have control over their monetary policy”.
He explains that the world has fallen in two where investors have been “in a bit of a goldilocks scenario” for years where country risk premia didn’t matter.
He gave the example of Russia stocks, adding that a lot of the things that were taken for granted in the global financial system “is no longer as safe”.
“That brings it back to country premia and also being self-sufficient,” he says as he alludes to India banning wheat exports over food security fears.
“We’re interested in countries like Brazil. The real is the second-best performing currency – not a currency we would expect to do well when markets are frapping out. But it’s a country which is self-sufficient and its commodities are not part of the Russia China sphere which is suddenly very interesting,” he says.
He adds that the fund has now invested in Mexico which if it wants to reshore then it won’t want to get goods from the likes of Indonesia, Turkey or China.
‘Reason globalisation exists and trade happens’
James Yardley, senior research analyst at Chelsea Financial Services, says there’s “undoubtedly” a growing trend against globalisation which has been further encouraged by the heightened geo-political tension and “the end of the unipolar world”.
China’s challenge of the US means that security over economic considerations are now a priority but this isn’t just a China / US story.
Yardley says: “Australia is a huge exporter to China but it has been forced to choose security over prosperity. It’s similar with many other countries in the Asia Pacific region.
“Countries are increasingly being forced to take sides. A neutral trade policy is increasingly unviable. You’re either with us or against us. The Russian situation highlights this and we’ve seen the immense political pressure the likes of Germany have come under.
“Less trade and less cheap labour means more inflation. In a less secure and more inflationary world countries are also remembering the value of strategic industries. Food being one. Note the recent moves out of Indonesia and India to ban palm oil and wheat exports respectively. We’re also remembering the value of a defence industry.”
However, despite the recent turmoil, Yardley says “there is a reason globalisation exists and trade happens”.
He says: “Trade is immensely beneficial for economies and without it we all suffer. Companies will continue to try and find cheap labour. Even as Chinese factories close down multinationals are increasingly moving their operations to Vietnam etc. most production is still not being brought back home. It is simply too inefficient and costly to do so.
“I would say globalisation is retreating but not dying. Many in the West have complained about globalisation but the sudden re-emergence of inflation is a stark reminder of one of its benefits. Globalisation has kept prices low. If you don’t want it that’s fine, but be prepared to pay a lot more for your goods.”
Given the priority shift from economy to security, Yardley suggests FTF Martin Currie European Unconstrained fund which has defence and resource scarcity, including food as themes and the LF Montanaro European Income fund which has semiconductors as a theme. The manager Alex Magni recently said there is a “huge amount of money being thrown at the problem by companies as they’ve realised they can’t rely on one supplier”.
He also mentions Unicorn Smaller Companies and Guinness Global equity Income funds which both have a few defence stocks on the portfolio.