Baking up an investment portfolio
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Making it cheaper to trade goods across borders was deemed to be an unquestionable good at the start of this century. But in practice it has meant that, in some cases, whole industries have moved from rich companies with expensive labour, to poorer companies with cheaper labour. We’ve got cheaper goods as a consequence, but we’ve also had high unemployment and/or depressed wages in specific regions.
As Jim Leaviss, manager of M&G Global Macro Bond, commented recently: “China joining the World Trade Organisation in 2001 didn’t start the process of globalisation, but it did signal that everything had changed, especially for manufacturing companies. The supply chain became a global one, and goods prices collapsed as we all imported cheap stuff made by people earning fractions of western wages. The liberalisation of trade barriers and tariffs, together with advances in the logistics and cost of containerisation and shipping, meant that manufacturing jobs went east and cheap goods flowed west.”
The manufacture of smartphones – a product almost everyone of us has and uses multiple times daily for multiple aspects of our lives – is a great example of this, as shown by Jim’s picture below.
Globalisation today has become a bit of a dirty world and it is facing a big backlash, with populism on the rise, events such as Brexit and Donald Trump “Putting America first” with his Trade Wars – to name just a few examples. David Jane, a fund manager at Miton, said recently that: “The era of globalisation is over and the world is becoming more local and regional. The never-ending trade dispute between the USA and China is just one of many pieces of evidence to support the thesis that ‘globalism’ in all its forms is now a spent force.”
Govinda Finn, an economist at Aberdeen Standard Investments, says that the nature of globalisation is changing. “It’s not just about the physical movement of goods and capital across national boundaries any more. What we are starting to see today, and could still see more of in the future, is profoundly different: it is the global trade in information and human talent. This points to the potential for a new form of globalisation – one enabled by technology.”
Read more about the AXA Framlington Global Technology fund
“Technology has changed the course of globalisation in the past,” Govinda points out. “It played a critical role in facilitating the period of hyper-globalisation between 1990 and 2007, when technological advances – mainly through the internet – allowed firms to establish global supply chains and facilitate international transfers of knowledge.
“There are already signs that the services work force is reorganising along these lines. Tele-migration services – in the form of international freelancers or the ‘human cloud’ – are creating a highly skilled and globally mobile workforce that could transform value chains within the services sector. And the rollout of 5G technology has the potential to greatly accelerate this shift,” Govinda added. “This upgrading of telecommunications infrastructure is expected to improve speeds a hundred-fold, dramatically reducing delays in the transfer of information. This should facilitate the fast and seamless flow of data and digital goods across borders. And beyond simply improving internet speed, 5G is expected to lead to a plethora of technological innovations, from smart infrastructure to autonomous driving.”
Hear more about the investment opportunities of 5G in the Investing on the Go podcasts with Tom Slater, co-manager of Scottish Mortgage Investment Trust, and Peter Meany, manager of First State Global Listed Infrastructure.
Globalisation was, to a large degree, driven by cheap fossil fuels – think those logistics and cost of containerisation and shipping, that Jim Leaviss mentioned earlier.
“Offshoring replaced more expensive developed market labour with cheaper emerging market labour and transport costs,” David Jane added. “Renewables generally produce electricity, which is a poor transport fuel, as batteries are heavy compared to fossil fuel. However, renewable energy is now cheaper than fossil fuels for most purposes. If transportation is becoming relatively more expensive and inefficient, then the attraction of local production close to the end market also becomes much greater.” Localisation or regionalisation instead of globalisation.
VT Gravis UK Infrastructure Income is an Elite Rated fund that is heavily invested in renewables. But it’s not all plain sailing. In a recent podcast, Will Argent, investment advisor to the fund, said that developments in energy storage will be key.
“This trend supports another theme: industrial automation and robotics,” continued David Jane. “Greater domestic production will require a higher level of automation, as cheap emerging market labour is replaced by a more expensive and skilled developed market labour, supported by robots and other new technologies. In the long term we expect manufacturing to become cleaner, highly automated, highly customisable and close to its customer.”
But this ‘new globalisation’ is not guaranteed. China’s Huawei, one of the world’s largest telecom-network firms, was dragged into an increasingly bitter feud over data security. “The politics here are complicated, but the impact on business is undoubted,” said Govinda Finn. “Exclusions on regulatory grounds are likely to cost billions and could delay the launch of 5G networks by years.
“More generally, barriers to international trade in services remain high, with no harmonisation of national standards. To create the same sort of supply-chain acceleration that occurred in physical trade, governments will need to open up domestic sectors that are currently protected, and allow technology to facilitate transformative change in digital trade and services,” he concluded.