- Onshoring (moving manufacturing back home), renationalization and regionalization have become the latest trends for companies, deglobalization if you will.
- Investors who have yet to face such geopolitical and macroeconomic conditions during the arc of their investing career may find themselves like fish out of water, but there are “safe-ish” assets to take bets on as geopolitics takes front and center.
Slowly but surely, the countries of the world are erecting walls and highlighting their borders as nations draw inwards on themselves.
Old ideological lines have been redrawn, with authoritarianism on one end of the spectrum and liberal democracies rising to meet the challenge.
Earlier predictions of the “end of history” have not aged well – liberal democracy is not a foregone conclusion, and if nothing else, has been in retreat over the past three decades.
Much of this has to do with globalization and a sense of disenfranchisement as widening inequality from asset owners to those who work those assets becomes fertile ground to foment unrest.
Nowhere is the fear that globalization has come to an end more palpable than in the exclusive Swiss resort of Davos, where those who have the most to lose from an overthrow of current systems and structures by the proletariat gather to figure out how to prevent this from happening.
Onshoring (moving manufacturing back home), renationalization and regionalization have become the latest trends for companies, deglobalization if you will.
For the past three decades, stuff was designed in the U.S. and made in China, even though the two countries made for strange bedfellows, the marriage of convenience worked.
And for so long as China kept lapping up American debt (US$1.1 trillion worth of U.S. Treasuries and counting), the status quo became a comfortable compromise which enriched both nations.
But the Russian invasion of Ukraine has been a watershed moment and Beijing’s refusal to condemn Moscow, a close ally, has re-emphasized the opposing political spheres that China and the U.S. occupy.
U.S. President Joe Biden’s gaffe where he said that the U.S. military would come to the aid of Taiwan should it be invaded by China, doesn’t help matters either.
Investors who have yet to face such geopolitical and macroeconomic conditions during the arc of their investing career may find themselves like fish out of water, but there are “safe-ish” assets to take bets on as geopolitics takes front and center.
In the next phase, companies with diversified manufacturing bases are likely to fare better than those concentrated in one location, for instance China.
American companies that manufacture closer to home, say in South America, in particular Mexico, are at less risk of geopolitics putting the kybosh on their supply chains and production.
Companies that are manufacturing in Southeast Asia, in particular Vietnam, Malaysia and Indonesia, could also be better positioned to secure their means of production, than those who have thus far relied on China.
Although gold prices are depressed – the recent large sales of gold at the Bank of England appear to suggest that the precious metal still retains some luster, especially from embattled central banks having to raise hard currency quickly to defend against a rising dollar.
Pharma companies that have bases for generics in India could remain resilient, especially as New Delhi has artfully managed to chart a path that upsets not Moscow, Beijing or Washington.
Inevitably, margins will be squeezed because the increase in costs can’t be entirely passed on to consumers, so companies with already thin margins should be monitored closely and unprofitable stakes in these firms, cut early to prepare for the new dawn of deglobalization.
The investment territory may appear unfamiliar, but the world has been here before – periods of globalization have helped usher in peace and prosperity but inequality foments authoritarianism, leading to deglobalization, leading to conflict and poverty.
History charts a predictable arc in that sense and portfolios should be primed to take that into account.