Globalization reshaped the world economy over the past four decades, linking countries through the free flow of capital, people, and goods to bolster growth and—at least in theory—engender geopolitical harmony. Along the way, it built China into an economic powerhouse, pulled more than a billion people out of poverty, and created a burgeoning middle-class hungry for US goods.
As the world grew closer, US companies tapped low-cost labor abroad to create efficient global supply chains, reducing the need for warehouses filled with inventory and contributing to record profits and a free flow of cheap goods that helped keep a lid on inflation.
Much of that is now in question. US-China tensions, the pandemic, and Russia’s invasion of Ukraine have exposed the risks of global integration. China’s ascent into a formidable economic and geopolitical rival has pushed the US to increasingly view its relationship with the world’s most populous country through a national-security lens.
That has been compounded by pandemic-related disruptions. US hospitals are rationing X-rays and CT scans because of shortages in chemicals, in turn caused by factory shutdowns thousands of miles away. Apple (ticker: AAPL) has warned that it could take as much as an $8 billion hit to sales in the current quarter as China’s zero-Covid policy interrupts supply chains and dents economic activity. India and Turkey are banning exports of grains and agricultural products as the war in Ukraine exacerbates food security concerns.
“For years, companies operated on the belief that periodic tensions with China or Russia wouldn’t disrupt critical supply chains covering goods, energy, metals, and minerals,” says Myron Brilliant, head of international affairs at the US Chamber of Commerce. “That assumption is no longer the case,”
Globalization 2.0 will take shape over years, but the early contours are already visible, with more companies and countries stressing safety and resiliency over cost and efficiency as they look to diversify and duplicate supply chains around the world.
A byproduct, at least in the short term, could be more trade as companies build up inventory as buffers. Even with the trade war, export restrictions that blacklisted some Chinese companies from US technology, and supply-chain disruptions, global trade hit a record $28.5 trillion last year—13% higher than in prepandemic 2019.
In the long run, Globalization 2.0 is likely to be less lucative for the private sector asr often direct a larger share of investments, on national-security rather than economic grounds.
“The economic costs are going to be real,” says Adam Posen, president of the Peterson Institute for International Economics. The result, he says, will be “lost opportunities,” lower returns on investment, and increased volatility.
That volatility could mean opportunity for investors in companies that are facilitating this shift by helping countries become more self-sufficient in critical areas such as semiconductors, or building production closer to home or in friendlier destinations.
Shares of many of these companies could get even cheaper in the coming months as the market digests recession concerns and the broader shifts at play. US equities are baking earnings growth for the next decade that suggests little change—even as the forces that boosted corporate profits are now challenged, says Rebecca Patterson, chief investment strategist at Bridgewater Associates, who sees reason for caution.
BlackRock CEO Larry Fink warns that the end of globalization as we know it is near—and could bring higher costs and margin pressures. Whirlpool CEO Marc Bitzer recently told analysts that the appliance giant was trying to reposition itself for a “new reality” of geopolitical tensions, freight cost inflation, and increased trade barriers as a result of the decoupling of global economies.
Big changes are ahead in areas linked to national security—including semiconductors and the rare earths critical to tomorrow’s technologies. Congress is expected to pass a China package this summer that includes money for more domestic semiconductor production and incentives to bring manufacturing of critical goods home—or at least move production to friendly countries.
China is moving to shore up its own technology and food security, as well as reduce its reliance on the dollar following the West’s sanctions on Russia. China is banning senior officials of the Communist Party and their families from holding real estate abroad or shares in companies registered abroad, The Wall Street Journal reported this past week.
Barring a Chinese invasion of Taiwan, a decoupling that completely unwinds globalization is unlikely, considering the deep financial and economic ties between the US and China. Exports to China represented about 858,000 US jobs in 2020. More than 300 congressional districts have 1,000 or more jobs supported by those exports, according to the US-China Business Council.
,The winners of this coming wave of globalization will be India and Southeast Asia. Everyone wants to invest there.,
The latest survey by the American Chamber of Commerce in China indicated that about half of the delayed or decreased investments because of the latest Covid outbreak. Just 14% of businesses surveyed last year by the US-China Business Council reported moving any part of their supply chain out of China. But strategists expect more new investment beyond China as companies look for regional alternatives and countries form regional blocs with like-minded nations.
Parag Khanna, founder of global strategic advisory firm FutureMap, says the US is well positioned for this next wave because it is relatively self-reliant on multiple fronts. At the same time, he sees the center of gravity in trade moving east.
China accounts for 15% of global exports, nearly twice that of the US, and is the largest trading partner for just about every major country. China also sits at the center of the world’s largest trade bloc—the Regional Comprehensive Economic Partnership—which includes Japan and Indonesia, plus a dozen other countries.
Countries are hesitant to pick sides, even as the US begins a campaign to bolster its Indo-Pacific alliance and form closer relationships with India and Southeast Asia.
“The winners of this coming wave of globalization will be India and Southeast Asia. Everyone wants to invest there: There’s a growing middle class and a more open society and democratic ways not found in China,” Khanna says. “They are in the sweet spot of geography, geopolitics, and demography.”
The transition to Globalization 2.0 promises to be gradual and messy, but investors can use the recent global market selloff to identify winners and recalibrate their assumptions about profits, economic growth, and returns.
Three funds and nine companies serve to illustrate the investments in the sweet spot for the upheavals to come.
India’s size, young workforce, and democratic system put it in an attractive spot as companies seek alternatives to China. India is stepping up efforts to become more competitive for manufacturers, cutting taxes and offering incentives to bolster its “Made in India” push, says Matthew Dreith, associate portfolio manager of the Wasatch Emerging Markets Select fund.
The iShares MSCI India exchange-traded fund (INDA) is a broad-based way into the action. Indian industrial companies are…
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