Deglobalisation: Beneficiaries Of The Reversal In Global Trade
Globalisation is likely to have peaked amid the rise of populism and protectionism as well as social and environmental challenges. The shifting trend from globalisation to regionalisation/localisation is creating opportunities in regional/local markets including mid- and small-caps. At the same time, deglobalisation also entails more political/geopolitical uncertainty, which could lead to market volatility. Investors are recommended to hedge their portfolios with safe-haven assets.
• New trade dynamics/new production hubs (Taiwan and South Korea for upstream manufacturing products and Southern Asia for low-end consumer goods)
• Brexit (domestic British stocks, UK REITs, GBP) •US election (almost all presidential candidates have plans that will benefit US consumers)
• Mid- and small-caps
• Hedge with safe-haven assets (such as gold, JPY, tactical long USD opportunities)
How can investors benefit in the regionalisation/localisation?
Bilateral trade conflicts (e.g. US-China, Japan-South Korea etc.) have been replacing multilateral trade agreement frameworks (e.g. NAFTA, TPP). There are more signs that companies are moving some parts of their supply chains or planning relocations of their supply chains regionally/locally, which should have profound implications for the regional and local economies in the medium- to long-term.
In an attempt to benefit from US-China trade tensions, some EM Asian countries are offering tax incentives to attract companies looking to shift their supply chains out of China. For instance, India imposes new manufacturing companies a corporate tax of only 15%, effective since 1 October 2019 (vs. 22% for other companies). Thailand has also announced a 50% tax cut for businesses moving from China. Furthermore, Taiwan’s ‘homecoming’ policy, which entails a provision of industrial land and tax breaks, announced in November 2018, has so far been successful in facilitating the return of 142 companies with approved investment projects valued at TWD 611 billion (USD 20 billion). We expect the redistribution of supply chains to benefit Southern Asian countries for low-end consumer products, and Taiwan and South Korea for sophisticated upstream manufacturing products.
With the Conservative Party winning a majority in the election, we expect Britain to leave the EU by the end of January and some moderate fiscal stimulus in 2020 to bolster the economy. As a result, we expect to see a re-rating in UK equities and UK REITs, as well as a rebound in Sterling.
US equities generally perform well in an election year with the S&P 500 index gaining an average of 9% in the 12 months prior to the election (based on figures since 1964). So far, almost all presidential candidates have plans to benefit US households. Investor expectations of more favourable policies to boost the domestic economy in the medium term should be positive to US equities.
Small and medium-sized enterprises tend to be more domestic-oriented. With domestic and fiscal easing measures to support local economies, SMID caps should benefit from the cyclical recovery. Some SMIDs may also benefit from the shift of supply chains.
Dealing with political uncertainty
The trend of deglobalisation could also create persistent political/geopolitical uncertainty. 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.
The trend of globalisation 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
Brexit does not materialise in the near future as:
• A Brexit stalemate results from a hung parliament
Intensified trade tensions lead to a global recession in 2020. Investors then become ‘risk-off’ which hurts equity performance, while safe-haven assets perform nicely.