Market Views: How could the deglobalisation of supply chains impact Asian investors?
Amid reports of deglobalisation having been accelerated by a post-Covid economy and geopolitical tensions, analysts have viewed the shift as an evolution of globalisation or "reglobalisation" as they eye investment opportunities in Asia.
Economists have warned that the uncertain post-Covid recovery, the war in Ukraine and ongoing US-China trade tensions have spurred a shift towards a deglobalised world, characterised by more localised regulations and cross-border controls.
However, some investors warn against oversimplifying the phenomenon, while others do see opportunities.
Earlier this year, Rohit Sipahimalani, chief investment officer of Temasek said that there are still many investment trends that he believes will remain valid over the next decade, such as biotechnology, healthcare, sustainable living, new energy, clean transportation, food and water.
However, Sipahimalani believes that investors will need to adjust the lens with which they assess these opportunities to include the prospect of deglobalisation. He sees a world emerging that could be bifurcated into a China bloc and a Western bloc.
“You need to underwrite your investment based on the domestic market opportunity, that's the key issue for us. We're looking at everything from a geopolitical lens and having large domestic markets is important,” he said.
This week, we asked fund managers for their views on the impact of deglobalisation supply chains, and the risks and opportunities that could arise from this shift, particularly for Asian investors.
The following contributions have been edited for clarity and brevity.
Prashant Bhayani, chief investment officer, Asia
BNP Paribas Wealth Management
The global shocks of the past two years have triggered a shift in economic megatrends across the globe. New long-term structural trends have been set into motion, or at least given a huge boost. 'Nearshoring' of supply chains take time, but the change is in place. A recent survey of corporate CEOs stated 93% of global supply chain leaders are planning to increase supply chain resilience.
Some areas of focus include energy, national security and sustainable growth; security of water and raw materials where huge investments are necessary to build and maintain efficient and sustainable infrastructure; food security and other technology security sub themes where we are likely to see ramped-up investment in some areas of technology, such as semiconductor production and cybersecurity.
Ultimately, structural deflation in prices of commodities and strategic technology supplies has been replaced by a focus on strategic assets. In short, securing critical inputs that are important to the economy and some for national security. This could also boost inflation somewhat longer-term.
Brian Nick, chief investment strategist
The sanctions imposed upon Russia and the resulting exclusion of Russian assets from much of the investable universe could, if replicated, lead to a bipolar investment world in which some assets are 'OK' to own and others are excluded depending on where the purchases are made. But more broadly, economic interconnectedness does not seem to be on the decline, even as 're-shoring' of manufacturing and nationalist industrial policy – like the Chips (Creating Helpful Incentives to Produce Semiconductors) Act in the US – become more politically popular. US imports of both consumer and capital goods are down from their March peaks but still well above their pre-pandemic averages.
Brexit and the US-China trade war that began in 2018 are certainly recent high-profile examples of a less open economic arrangement between major economies. But consumers and businesses ultimately make the choices about from where to buy and to whom to sell. Protectionist economic policies can certainly affect those decisions on the margins, but thus far it’s hard to see a clear reversal in the long-standing trend toward globalisation. Where customers demand faster delivery times for a wider array of goods, localisation of storage and higher inventory levels are probably more cost-effective than mass onshoring of production.
Martin Hennecke, head of Asia investment advisory
St James’s Place
While deglobalisation risks due to tensions between East and West appear to be on the rise, Asian investors should take note that regionally, the world’s largest free-trade agreement – the RCEP (Regional Comprehensive Economic Partnership) – is slowly gathering momentum. Indonesia’s parliament has passed a law only last Tuesday ratifying the country’s membership.
This should result in increased supply chain integration regionally, bringing net benefits to all participants, along with attractive investment opportunities, helped by current reasonable equity and currency valuation levels. One partial exception on supply chains could be Japan, where onshoring/local manufacturing is becoming more attractive again due to the record Yen drop. Yet, RCEP benefits, especially lower taxes on China exports, and low valuation opportunities are very much present here.
I would not suggest though that one should focus only on specific sectors or discard companies exporting beyond Asia. Great businesses may be found across different industries/locations, and diversification is highly recommended for efficient risk management. Moreover, Asian investors should continue to watch out for inflationary risks, which may become more entrenched through high debt/deficit levels in many major countries, with higher commodity and producer prices where trade is being negatively affected on a wider global basis.
Tai Hui, chief market strategist, APAC
JP Morgan Asset Management
There are multiple factors challenging the progress of globalisation, including supply chain disruptions caused by the pandemic and Russia-Ukraine conflicts. However, expecting the world to ‘de-globalise’ is too simplistic, instead, there is an optimistic sign that globalisation is evolving instead.
Take automobiles as an example. In 2021, China’s total vehicle sales, at 26 million, was higher than the US and Japan combined. Of the top 10 economies in car sales, four were in emerging markets: China, India, Brazil and Russia. It shows that the global supply chain is no longer just meeting demand from the West, but increasingly serving emerging market consumers. Companies are also diversifying their supply chains to reduce disruption risks by moving their manufacturing processes to other emerging markets, where there are ample lower-cost labour and growing local demand, such as Vietnam and Indonesia. This migration will eventually extend to other emerging regions such as Latin America, sub-Saharan Africa and Central and Eastern Europe.
In general, we have seen a surge in cross border services over the past two decades as global consumers shift from consumption of goods to services. Although policy and politics have had impacted on direct investment and financial flows, the overall direction is still positive.
David Chao, global market strategist, Asia Pacific (ex-Japan)
The threat of geopolitical conflict is likely to mean supply chains adjust to more secure, accessible, and redundant sources of supply within the realm and control of particular countries or economies at the expense of trade flows optimised by comparative advantage, efficiency, and cost of production. It will also likely result in increases in military spending sustained by higher public expenditures at the expense of private consumption and investment.
Our view is that 're-globalisation', the restructuring of trade and investment relationships based on geographic, sectoral, or security goals, is likely to occur rather than either a resumption of global integration or widespread de-globalisation.
The silver lining is that 're-globalisation' is likely to increase the investment opportunity provided by country selection and the benefits from portfolio diversification. Geo-economic friction, supply chain restructuring, geopolitical tension or open conflict all point to diverging national economic and financial policies and performance. In fact, markets are currently experiencing these divergences.
China’s markets can benefit from investor interest in realising market diversification. However, global institutional investors will be mindful of the heightened risk of outright geopolitical conflict, particularly given the very recent experience in the Russia-Ukraine situation, and investors will size and evaluate portfolio exposures relative to these perceived risks. Reducing geopolitical tensions would lead to heightened investor confidence, market stability, and increased investment opportunity, so any efforts to alleviate such tensions would likely be rewarded through increased flows.
Matt Culley, co-portfolio manager, emerging market equities
Janus Henderson Investors
For the last several years we have been calling for the emergence of a bipolar, and increasingly multipolar world. The onset of the Covid-19 pandemic and Russian invasion of Ukraine have only served to accelerate the wheels of change initiated by the Sino-US trade-war.
Looking forward we expect the resulting deglobalisation to drive a rearchitecting of supply chains that will be inherently inflationary as production moves away from the lowest marginal cost. Countries like China must seize this period to invest behind innovation to move up the value-added curve and avoid the middle-income trap, while countries such as Vietnam who possess the necessary capabilities to capitalise on this will benefit.
In emerging markets, you must incorporate both country analysis and political governance considerations into your investment framework and the events of the past few years have only served to reinforce that view.
Haider Ali, associate portfolio manager, emerging markets discovery equity strategy
T Rowe Price
Pace of deglobalisation, starting from trade frictions between US and China in 2018, has gathered momentum as policy makers and corporates seek to secure supply chains. Just as the conflict in Ukraine focused policy makers’ minds on energy security, China’s Covid-zero policy increased urgency for corporates to rethink their manufacturing and distribution chains.
This acute need for diversification of supply chains comes after a decade of underinvestment in industrial and transport capacity globally, a clear example of which was shipping backlogs in 2020-21 as factories and shipping companies failed to keep up with surging demand for goods in Western economies.
Deglobalisation poses its own unique set of challenges and opportunities. While earlier champions of globalisation face risks of disruption and product price inflation, nimble companies which adapt to this new reality will be the long-term winner. Brand new consumer electronics assembly lines in India and EV component manufacturing plants in in the US or Europe are just two examples of companies moving closer to customers. This process of reshaping supply lines also requires new capex, more industrial metals and material, more human and capital resources all of which leads to secondary and tertiary beneficiaries.