As globalization fades, investors find new opportunities in emerging and developed markets.
In the final piece of a three-part series, we explore the impact of deglobalization on global markets and businesses, as the global economy shifts from the NICE era to a new era of deglobalization. Companies and policymakers are prioritizing resilience and security, creating new risks and opportunities for investors. India and Vietnam are top-ranked for diversifying manufacturing exposure, and other countries like South Korea, Kenya, Thailand, Indonesia, Poland, Germany, Mexico, and the United States are also well-positioned to benefit. Active managers must understand the broad range of affected markets, regions, sectors, and companies and keep an eye out for the butterfly effect. As inflation pressures reassert themselves, new opportunities will arise from around the world.
It was nice while it lasted. Beginning in the 1990s, the U.S. and world economies benefitted from NICE – the Non-Inflationary Consistently Expansionary – era. The era was driven in large part by globalization. Companies surged into China and other countries in search of low-cost labor and cheap, efficient manufacturing and supply chains. With some hiccups, growth stayed high and prices and inflation stayed low.
Now, we have edged into the new era of deglobalization. Impacted by Covid-19 disruptions and wary of unpredictable world events, companies and policymakers are re-prioritizing resilience and security for their manufacturing and supply chain operations, rather than focusing purely on cost reduction.
But it’s not just deglobalization that’s changing the world order. Demographics and decarbonization are also creating tectonic shifts, bringing about what we’re calling the 3D Reset. We believe the convergence of deglobalization, demographics and decarbonization is leading to higher inflation pressures and tighter monetary policies worldwide. Reconfiguring supply chains has already raised prices for goods.
As the globalization dividend winds down, the 3D Reset is creating new risks and opportunities for investors. As re-shoring, near-shoring, friend-shoring and more yet-to-come-shorings accelerate, a range of countries, markets and asset classes stand to benefit.
While China will continue to play an important role in the global economy, it’s helpful to look at what other countries stand to benefit from manufacturing shifts and supply chain restructuring. In a recent report, we analyzed four key factors in assessing which economies stand to benefit from these changes. Taking into account the labor pool, ease of doing business (business freedom), per capita GDP, and productivity, we see a wide range of countries, both in emerging and developed markets, that are well positioned.
India, with its vast labor pool and lower labor costs, is ranked No. 1 for multinationals looking to diversify their manufacturing exposure. Vietnam, at No. 2, shares India’s advantages, as well as high productivity. Other factors, such as business freedom, boost South Korea. But the sweep of countries poised to benefit is broad and geographically diverse, spanning Kenya, Thailand, Indonesia, Poland, Germany, Mexico and the United States, among others.
There may also be investible trends within those shifts, such as a partial bifurcation where advanced manufacturing gravitates to developed countries, and developing countries attract work that requires a vast labor force.
Those opportunities could also be reflected in worldwide stock markets. As noted, active managers will be attuned to a changing array of opportunities. They’ll require deep knowledge, though, to understand how a broad range of markets, countries, regions, sectors, and companies will be affected. They’ll also need to keep an eye out for the so-called butterfly effect, in which changes in one area can have unexpected impacts somewhere else.
With the 3D reset, we are looking ahead to a world that is no longer buoyed by globalization’s decades-long but dimming ascent. In this world, NICE - Non-Inflationary Consistently Expansionary – has been traded for “necessary,” where inflation pressures reassert themselves and opportunities will be hewed from new sources around world.
Subscribe to our Insights
Visit our preference center, where you can choose which Schroders Insights you would like to receive
The views and opinions contained herein are those of Schroders’ investment teams and/or Economics Group, and do not necessarily represent Schroder Investment Management North America Inc.’s house views. These views are subject to change. This information is intended to be for information purposes only and it is not intended as promotional material in any respect.