David Jane looks for the investment opportunities that a reconfiguration of the world economic system provides.
We have for many years recognised that the era of globalisation is over and the world is becoming more local and regional. The trade dispute between the US and China is one of many pieces of evidence to support the thesis that “globalism”, in all its forms, is a spent force.
It is obvious that the major global trade-related industrial sectors are set to suffer from this trend. What is often ignored is that the era of deglobalisation will have long-term benefits across a number of industries, and these make up some of our preferred long-term themes.
One of our longest-running themes has been the new energy economy. Globalisation was, to a large degree driven by cheap fossil fuels. Such fuels are the key to long-distance transportation and, therefore, offshoring replaces developed market labour with cheaper emerging market labour and transport costs.
Renewables generally produce electricity, which is a poor transport fuel as batteries are heavy compared with fossil fuels. However, renewable energy is now cheaper than fossil fuels for many purposes.
If transportation is becoming relatively more expensive and inefficient, then the attraction of local production close to the end market becomes much greater.
We see an economy in which energy is getting progressively cheaper, which is good for growth, but where transportation is relatively less attractive, as long-distance transport will continue to rely on fossil fuels for the foreseeable future.
This trend supports another of our themes; industrial automation and robotics. Greater domestic production will require a higher level of automation as cheap emerging market labour is replaced by more expensive and skilled developed market labour, supported by robots and other new tech.
In the long term, we expect manufacturing to become cleaner, highly automated, highly customisable, and close to its customer. Recently, capital investment has been relatively low and so we haven’t been emphasising this theme in portfolios. However, if we see a cyclical reacceleration, it is an area that will undoubtedly become more important to our portfolios.
Another impact of deglobalisation has been an emphasis on relatively self-reliant economies for our emerging market exposure. Rather than focusing on export-driven economies in South East Asia, we have held Indian equities, which is an economy largely driven by domestic consumption rather than exports to the developed world. This has meant that India has been largely unaffected by the trade wars and the significant reconfiguration of supply chains taking place in an era of deglobalisation.
The big loser from deglobalisation is Europe. Exports from Germany have been the big economic driver for some time. These exports have, in recent years, been very directed towards China, and this is a major cause of the slowdown in Europe.
Europe has always had a relatively weak domestic consumption sector, hence the recent suggestion that fiscal policy might rekindle economic growth.
We have been focused on deglobalisation as a theme for several years. Recently, it has become a major market theme around the trade wars. We think that it is wise to think beyond the immediate negative impacts, and seek out some of the positive opportunities from a reconfiguration of the world economic system.
David Jane is manager of Miton’s multi-asset fund range.