The fundamentals that underlie the stock market have been changing. That set of changes may make prolonged bull markets less likely going forward. As noted in an MSN article, the perfect bull market cocktail that we have experienced for four decades is ending. Historically low interest rates that drove much of the bull market after 2009 are gone, the US and EU aim to bring critical industries back onshore, and major demographic shifts are likely to reduce productivity across the world. Investors will need to use strategies such as investing for the end of globalization.
Era of Globalization
In 2018 e-commerce titan Alibaba moved its headquarters to Xi’an, China. Aside from any practical business advantages the move entailed, it was highly symbolic. Xi’an was the start of the Silk Road for commerce in and out of China with the Middle East and Europe. This was the first hint of globalization. Economists say that there have actually been three or more waves of globalization of which we are now in the slowing phase of the most recent wave. In the Age of Discovery, sailing ships from Europe crossed the globe and brought back exotic goods to Europe. During the Industrial Revolution and into the 20th century the West and later Japan and the Asian Tigers extracted cheap raw materials from less developed economies and sold manufactured goods. Finally, China emerged from its cocoon of isolation and with a mammoth population, cheap labor, and extensive investment from the West, grew to be the world’s dominant industrial power.
Benefits of Globalization
Businesses in the US and Europe quickly saw the advantages of outsourcing production to China. Labor was cheap. Japan pitched in to help develop efficient management systems, Japan and German helped with technology to make assembly lines, high speed rail transit, and other advances more efficient and profitable. Investors far and wide poured money into China as shown by stats for foreign direct investment in China. The result was increased profits for companies that outsourced to China in terms of lower labor costs. Consumers across the world got access to consumer goods at lower prices. China grew to be the world’s dominate manufacturing power.
Downsides of Globalization
As whole industries pivoted to China and the Chinese government directly favored what they considered to be critical industries, the US and Europe saw the loss of industries and skill sets on a scale never seen before outside of war. Starting in 1990 and accelerating after China joined the World Trade Organization in 2001 the US lost in excess of two and a half million manufacturing jobs and a generation of critical skills. US and EU military and strategic planners worried about dependence of the West on critical materials, products, and technology from China. When the Covid Pandemic hit full force, dependence of China for things as common as protective masks and aspirin became problems. The computer chip shortages that drove consumer prices up were, at least in part, caused by unending city-wide lockdowns due to China’s zero Covid policy.
The problems with globalization and depending on other countries on the other side of the world for necessary raw materials and products were made clearer with the Russian invasion of Ukraine and disruption of the supply chains for grains like wheat and corn, oil, natural gas, fertilizers, and strategic minerals. The bottom line is that nations across the globe are reconsidering their dependence on distant suppliers for raw materials, goods, and services that can be produced at or close to home. For investors this means investing for the end of globalization.
Envisioning NAFTA as One Market
Trade negotiators from Mexico, Canada, and the US meet from time to time in what are typically referred to as “three amigos” summits. There are always concerns about how policies that benefit one party may hurt the others, but the bottom line for NAFTA is that trade relationships in North America are bound to grow as companies retreat from China and governments bring critical industries like computer chip making back on shore. More and more it will be useful to see NAFTA as one big market and not three countries with a trade agreement.
Offshoring and Aging Populations
A surprising factor has arisen that is causing some Chinese companies to consider offshoring their production to places like Mexico and Vietnam. China’s population is starting to shrink at the same time that it is aging. China will be seeing more and more elderly retirees and fewer younger workers to fill jobs and pay taxes. Because China has developed substantially since the days when it relied on unlimited cheap labor to flood the world with their products, they will find it increasingly hard to compete with nations like Vietnam, Mexico, and Indonesia on price alone. While this would seem to be a globalization trend it works contrary to the trend for nations that have lost jobs to China over the years. For the investor, it creates investment opportunities outside of China and even outside of Asia.
Investment Targets as the World Tightens Up Supply Chains
As the world increasingly starts to look inward, we believe that the best investment opportunities will involve contracted markets. Such a market is NAFTA, which is not small but encompasses North America instead of the world. Likewise, we expect the West and its close allies to remain connected economically as well as politically and militarily. Thus, companies from South Korea, Japan, and Taiwan are building chip production facilities in the USA. For the foreseeable future an anywhere but China approach should add an anywhere but Russia approach as well or until the situation in Ukraine and with Putin is resolved.
Deglobalization of Technologies for the Future
A promising investment niche is electric vehicles and all of the infrastructure needed to make this switch from fossil fuel transportation a reality. While the world has the capacity to make lots of electric vehicles and is widening its supply chains for critical minerals like lithium, the majority of lithium battery production takes place in China. As production facilities are developed outside of China, they will become profitable investment targets along with similar industries necessary for a whole range of higher tech developments.
Investing for the End of Globalization – SlideShare Version
Investing for the End of Globalization – DOC