Responding to Deglobalization: Seizing Domestic Opportunities
The global economy has become increasingly connected since the 1980s – but is this historic process going into reverse? The war in Ukraine, geopolitical tensions between the West and China and the impact on supply chains of lockdowns in Chinese cities are all contributing to a sense that economies need to be more self-sufficient. BlackRock chairman Larry Fink wrote in his letter to shareholders that companies and governments would need to re-evaluate their dependencies on other nations.
This shift in perceptions is set to transform the way major businesses operate and the way investors allocate capital. Companies are finding they need to rethink their approach to international manufacturing, and the rebalancing is adding to investors’ inflation headaches as the switch to domestic sourcing pushes up consumer prices.
The decline of globalization has been gathering momentum for some time: global merchandise exports dropped from 27% of global GDP in 2008 to 19% by 2021. Recent events have only accelerated this process, though.
The shock of Covid-19 left many companies in traditionally export-oriented countries suddenly cut off from international markets, prompting them to turn their attention to cultivating domestic demand. Now, the Russia-Ukraine war is again forcing companies to shift their focus from supply chain efficiency to resilience; they need to rethink where they produce and where they sell.
The resulting structural change requires countries, companies and entrepreneurs to recalibrate their trade and value chains.
Picking a new crop of winners
Responses to deglobalization take multiple paths. For exporters, it means a renewed focus on servicing domestic consumers – especially in major emerging markets such as China and India. For importers, new production approaches are critical, such as using technology to automate or remove tasks.
In the near term, deglobalization is likely to mean slower growth, with potential implications for corporate profitability and equity investments.
Speaking at the IMF Spring Meeting in April, Jerome Powell, Chairman of the US Federal Reserve, said that deglobalization would certainly lead to “a different world”.
“It might be a world of perhaps higher inflation, perhaps lower productivity, but more resilient, more robust supply chains,” he said. “The supply chains that we had were very efficient, but they were quite fragile.”
As with all macroeconomic challenges, though, deglobalization also creates opportunities for new business models, benefiting the entrepreneurs and shareholders who support them.
As companies re-shore production or seek more customers close to home, they will need to invest in alternative ways to make or sell products. Technology is often the answer to this type of business challenge.
Software, the Internet of Things, 5G connectivity and the delivery of anything as a service (XaaS) are emerging as a bright spots amid deglobalisation’s new growth and contraction cycles.
Historically, manufacturing moved out of the West and into Asian countries to leverage cheaper labour. In some cases, though, that trend has already reversed. Labor costs in China, for example, are still well below the US, but the same is not always true for other costs – such as land, energy, freight, or raw materials. Digitalization and automation then help even out operating costs.
Stepping towards growth
For firms looking to reimagine and reconfigure deglobalized businesses, investment in logistics, telecoms or data infrastructure technologies may be compelling opportunities. XaaS – a broad term for a wide range of cloud-based IT products and tools that are delivered to users as a service via the internet – offers a similar type of replacement or automation for companies that need to build out new domestic operations quickly.
Market research firms are projecting compound annual growth rates ranging between 24% and 28% until 2028 for XaaS as a sector, with projected market valuations ranging from US$180 billion in 2021 to over US$2 trillion in 2028. XaaS is already an established concept in sectors such as insurance, manufacturing, healthcare and finance.
A nimble approach to new opportunities is just as important when it comes to equity investments. Long-term shareholders in listed companies have a distinct advantage, as they are able to use these core holdings to access the liquidity they need to invest in new ventures.
Securities-based financing can be an attractive source of capital for accredited investors, professional investors, and otherwise qualified investors seeking to pivot without giving up their long-term interest in core equity holdings. At a time of growing uncertainty and tighter monetary conditions, the ability to access flexible capital fast is more critical than ever.
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