Sectors Caught in the Crosshairs of a New Era of Globalization
In sectors at the heart of great power rivalry and protectionist industrial policy, a new set of investment opportunities and risks are emerging.
- Berlin Wall falls, China enters the WTO, and the internet goes mainstream
- Supply chains are borderless and manufacturing shifts to the lowest-cost producers
- Global trade’s share of GDP nearly doubles to over 60%
- The GFC causes the era of unfettered globalization to unravel
- Backlash against globalization gains momentum and nationalist movements gather force
- Growth in global trade slows significantly
- Covid-19 pandemic exposes supply chain vulnerabilities
- Russia’s invasion of Ukraine leads to threat of energy crisis in EU
- Great power rivalry and national security concerns usher in a new era of industrial policy
A Shifting Global Economy
The latest phase of globalization alters the macro landscape for investors.
1. Commodities transmit geopolitical tensions to supply chains and markets
- Natural resources like fossil fuels, food, as well as critical metals and minerals are prime candidates for geopolitical weaponization bygreat powers.
- Episodic disruptions of commodity supply chains – whether due to extreme weather, climate events or geopolitical strains – can be transmitted more broadly to the global economy and markets.
2. Less efficiency and productivity in select sectors
- If globalization optimized for highest productivity and lowest cost, it follows that near-shoring and friend-shoring – which can create redundant sources of supply – may be less efficient.
- In the case of sophisticated, precision manufacturing like advanced semiconductors, much of this new capacity in new locations is not likely to be as efficient or productive as legacy capacity.
3. Upward pressures on inflation and term premia
- With economic and national security vulnerability considerations on the rise, efficiency and productivity no longer prevail as sole drivers for supply chains – and this will weigh on economic growth. Furthermore, these new supply chains are often more costly ones.
- This inflationary force can be amplified by key intermediary goods – like energy and semiconductors. That is, they are critical inputs into a wide range of goods and services and can spread the inflationary pressures more broadly.
- The potential for higher and more volatile inflation going forward as well as the increased government spending from industrial policy may lead to less compressed term premia than previously.
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Portfolio Implications
Four crossportfolio implications for CIOs to consider for the impact of the new dual-track era of globalization.