#Articles — 17.06.2020

Deglobalisation: Beneficiaries Of The Reversal In Global Trade

THEME 3

Theme d'investissement 4 | BNP PARIBAS WEALTH MANAGEMENT

The Covid-19 crisis will accelerate the deglobalisation trend. There are more signs that the supply chain disruptions due to lockdowns have led governments and companies around the world to reconsider their production models.

OUR RECOMMENDATIONS

Reshuffle of global supply chains and the creation of new production hubs

New production hubs with Taiwan & South Korea for upstream tech-related components/products, and Southern Asia for low-end consumer goods

Beneficiaries in the US and Europe

High value-added industries, a wide range of service providers and education

Political/geopolitical uncertainty

Hedge with safe-haven assets (such as gold, JPY and tactical long USD opportunities)

The pandemic accelerates a reshuffle of global supply chains

The Covid-19 pandemic has exposed the massive risks of sudden stoppages of economies and supply chain disruptions. It also highlights how dependent global companies are on Chinese manufacturing.

As a result, some governments have started to incentivise the ‘re-shoring’ of the production process:

•Japan announced that it would allocate USD 2.2 billion of its record USD 993 billion stimulus package to help its manufacturers shift production out of China and either back home or to Southeast Asia.

•The Trump administration is considering paying the moving costs of American manufacturers that leave China.

•An EU trade commissioner commented recently that the bloc would seek to reduce its trade dependencies and ensure the EU’s strategic autonomy. 

New production hubs

Post crisis, there could be more social pressure to re-shore some strategic areas and ensure self-sufficiency (medical supplies or other health care needs, for example). Manufacturing companies are also likely to put more emphasis on production base diversification as well as industrial digitalisation and automation. We expect the redistribution of supply chains to benefit Southern Asian countries for low-end consumer products, as well as Taiwan and South Korea for sophisticated tech-related components/products.

In the US and Europe, the trend towards repatriating production capacities is accelerating. Its birth resulted from a combination of technological innovation (allowing shorter supply chains) and rising wages in emerging countries. The great winners are the high value-added industries. Now, the wish to reduce dependency and tackle inequality is strengthened. 

Investment in education should be ramped up. Deglobalisation is also helped by the rising share of services in global GDP.

To sum up, key beneficiaries of deglobalisation in developed economies are higher value-added industries, a wide range of service providers, and education.

We remain positive on South Korea equities and upgraded Taiwan equities from neutral to positive in early May. Valuations of both markets became more attractive after the corrections. The tech-heavy Taiwan market will be a beneficiary of its ‘homecoming’ policy and global manufacturers’ demand for technology upgrades amid the technology disruption megatrend in 5G, IoT and AI. There is already growing evidence of a domestic Capex cycle.

Furthermore, after announcing a much lower tax for new manufacturing companies relocating to India in September last year, the Indian government reportedly reached out to more than 1,000 US companies (prioritising medical equipment suppliers, food processing units, textiles, leather and auto part makers) in April, offering incentives to manufacturers seeking to move out of China. Although the country is currently suffering from the lockdown, the proactive policy to stimulate its manufacturing sector is a positive factor for supporting the economy in the medium term. 

Dealing with political/geopolitical uncertainty

The accelerating trend of deglobalisation could create persistent political/geopolitical uncertainty. There has been mounting global backlash against China over its alleged handling of the Covid-19 outbreak in the early days. The Trump administration has publicly assigned China varying degrees of responsibility for the pandemic and has threatened new tariffs.

We recommend investors to hedge their portfolios with some safe-haven assets such as gold, the Japanese yen and/or some tactical long USD positions when opportunities arise.

MAIN RISKS

The trend of globalisation re-escalates again as:

• a comprehensive US-China trade deal is agreed;

• global trade tensions ease significantly;

• disruptive innovations in digital technologies substantially increase cross-border trade flows

Extended lockdown measures and a second wave of the outbreak lead to a deeper and prolonged global recession in 2020. Investors continue to be ‘risk-off’ which hurts equity performance, while safe-haven assets should perform nicely.