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The nature of globalization
We consider globalization the interdependence that arises as goods, services, people, and information cross borders and encourage globally integrated markets.
For example, a cell phone could:
Have components produced in South Korea or Taiwan
Get assembled in China
Be shipped to and sold in the U.S.
However, globalization is evolving as technological, economic, and political forces reshape the nature of interconnectedness of people and markets. What do investors need to know about this evolution, and what opportunities might exist in the coming years?
The future of globalization: Investing in an interconnected world
Presenter: Paul Christopher, CFA, Head of Global Market Strategy, Wells Fargo Investment Institute
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I have spent years living and doing economic and investment research in Asia, Africa, Europe, and Latin America, more recently on shorter research trips with my colleagues from Wells Fargo Investment Institute.
These trips give insight into the worldwide interdependence that arises as goods, services, people and information all cross borders — in what we may consider to be globalization.
For example, components for smart phones leave factories in South Korea and other countries for assembly in China, and then the finished products traverse the Pacific to U.S. buyers. That interconnectedness can lead to globally integrated markets.
But these supply chains also reveal some vulnerabilities, recently highlighted as the pandemic exposed U.S. reliance on overseas factories for essential health care products, like masks.
How will globalization evolve in the 21st century?
The growth of goods trade has slowed since 2009. Partly due to the growing tendency to locate production close to the end markets, but also because governments favor their local producers, typically by subsidizing them and by taxing imported substitutes.
On the other hand, the global trade in services also has grown rapidly, driven by exploding access to the internet, which now reaches more than half of the people living on Earth.
The near-instantaneous worldwide flows of information and investment cash regularly produce near simultaneous global market responses to news and events — a strong force for globally integrated markets.
What does this mean for investors?
We believe globalization is evolving toward broader investment opportunities in services and new technologies, and with more selectivity geographically.
We favor the U.S., first, and, parts of developing Asia. And increasing automation in the future may favor the Information Technology and Consumer Discretionary equity sectors. Finally, successful multinational companies may be compelled to adopt several new technologies and local market knowledge.
To learn more about strategies to position your portfolio to potentially benefit — please read our special report: The future of globalization: Investing in an interconnected world.
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There are crosscurrents at play in globalization—centripetal influences that continue to direct economies toward a centralized global market, and centrifugal influences that run counter to globalization.
This illustration shows some of the opposing forces promoting or blocking increased globalization. Centripetal forces promoting globalization include digital technology, cyberspace, investment and information. Centrifugal forces blocking globalization include populist sentiment, separatist movements, media censorship, and internet control.
The concepts of centrifugal and centripetal forces come from physics. Centripetal forces are inward, center-seeking, and integrative, working to keep a state together—like a tetherball circling a pole. Centrifugal forces are outward, center-leaving, and dispersive, working to break apart a central state—something like the spin cycle of a washing machine.
To understand these crosscurrents, it helps to look at the changes in the trade of goods vs. the trade of services.
The trade in goods has slowed since 2009.
Part of the slowdown is due to the increasing tendency to locate production close to the end market for goods. This is enabled by technology that can substitute for low wage labor allowing production to return to higher-wage countries, and closer to large consumer markets in developed economies, particularly the U.S. and China. The familiar pattern of extended supply chains, fragmented across multiple low-wage production centers appears to be evolving to a concentrated, high-tech, and regional system.
Merchandise trade activity is slowing
Merchandise trade activity is slowing
Sources: CPB Netherlands Bureau for Economic Policy Analysis and Wells Fargo Investment Institute, August 2, 2021
This chart shows merchandise trade activity growth rate since 2000. Using the trade volume of 2010 as a base of 100, the average annualized growth rate between 2000 and 2007 was 5.9%. Since then, trade growth slowed to an average annualized growth rate of 2.2% from 2011 to the second quarter of 2021.
However, the global services trade is doubling every five years.1
We believe that services trade will grow faster than goods trade, bolstered by digital tools, such as streaming content, with the ability to deliver services virtually and at low cost.2 The rapid adoption of digitalization will continue to support services trade growth and provide cost-cutting and time-saving benefits for companies and consumers.
2. For much more on the accelerator role that digital technology can play in driving services trade, please see Diana Korka, “UNCTAD Project on Measuring Exports of ICT-Enabled Services (Digitally-Delivered Services)” in Simply Services: A Trade in Services Speaker Series, World Trade Organization, Geneva, Switzerland, March 1, 2018
Global services trade on the rise
Global services trade on the rise
Sources: World Bank and Wells Fargo Investment Institute. Annual data from December 31, 1976, to December 31, 2020.
This chart shows U.S. global services trade in trillions of dollars from 1976 to 2021. The line starts near zero and gradual rises to nearly $2 trillion by 2004. The line then rises more quickly surpassing $6 trillion in 2018. It has since pulled back to $5 trillion.
With that backdrop in mind, what trends could point to potential opportunity for investors?
Emerging trends to watch
The evolution of globalization will have particular impacts in these six areas. Here’s what investors should know.
The combined pressures of population and economic growth, climate change, and barriers to trade may continue to place stress on food supplies and upward pressure on agricultural prices. This, in part, supports our view of a new, potentially multiyear bull market in commodities.
Water trading is the process of buying and selling water access entitlements, which takes place globally as an expanding population stretches limited water resources.
The agricultural sector accounts for 70% of the world’s water usage and over 40% in many developed countries, making water trading potentially attractive for both farmers and investors.3
3. “Water in Agriculture,” Understanding Poverty, The World Bank, July 30, 2021
As data storage shifts to the cloud, reliance on perimeter security and even on national borders no longer guarantees the safety of data and software.
Since 2019, the rise in cybersecurity funding has outpaced overall venture funding. During the first half of 2021, investors injected over $12 billion into start-ups that develop products and services for privacy, security, and identity protection.4
4. The New York Times, “As Cyberattacks Surge, Security Start-Ups Reap the Rewards,” July 26, 2021
Asia comprises about 60% of the world’s population, with below-average health care expenditures per capita in developing countries. We look for rising health care expenditures and opportunities for investment in the growth and increased globalization of the Health Care sector.
Artificial intelligence (AI)
By automating repetitive tasks and cognitive processes, AI can improve efficiencies and enhance knowledge and technological trade advantages, particularly in China and the U.S.
We expect a variety of investment opportunities: old-line manufacturers that adopt and adapt; cash-rich technology companies that use Big Data for logistics (supply-chain management) or to control consumer purchasing or information management; and firms that build sizable portfolios of patent and intellectual property rights, especially in materials and processes.
The demand for global infrastructure investment includes all parts of the energy supply chain, roads, railways, airports, and communications networks. Traditional sources of public funding are limited, and economic conditions are weak in many regions. Core infrastructure companies own long-duration global infrastructure assets with stable demand profiles and low cash-flow volatility. These investments may provide competitive risk-adjusted returns and an inflation hedge.
Key takeaways for investors
Important conclusions and implications for investors.
The big picture
The process of globalization is likely to continue
We believe that crosscurrents in technological, economic, and political forces likely will change the contours of globalization but not end it.
Globalization continues to evolve
However, the familiar pattern of extended supply chains fragmented across multiple low-wage production centers appears to be evolving toward more concentrated, high-tech, and regional trade. We believe that globalization is evolving toward much broader and persistent opportunities in traded services and cutting-edge technologies in the U.S. and parts of developing Asia.
Investment trends to consider
Geography favors the U.S. and parts of developing Asia over the rest of the world
We view the overwhelming advantage of the U.S. as not only its leadership in technology and services but also the adaptability of its multinational companies. We favor parts of emerging Asia over Europe and Japan because of the competitive advantage in technology and production capabilities, especially in manufacturing (China) and services (India), and in the Southeast Asian economies that form part of China’s industrial structure. Their growing middle class consumer bases and spending trends reinforce our outlook for increased domestic production. These geographic preferences align with recent increases to our strategic allocations in U.S. Large Cap Equities and Emerging Market Equities.
Certain sectors should benefit from expanding automation and services trade
Increased trade in services due to technological innovations that benefit consumers should favor the U.S. Information Technology (IT) and Consumer Discretionary sectors—and those we expect to benefit from U.S. government intervention in a post-pandemic world, including Health Care—of the S&P 500 Index.
Centrifugal forces will remain, but investors have potential hedges
U.S.-China trade and political tensions, as well as national policies of countries around the world to protect local producers, may require sudden shifts in production centers and deeper knowledge of local consumption patterns. This will compel multinationals to rely on technology and local knowledge to remain flexible. We believe that U.S. IT and Consumer Discretionary firms are well-positioned to compete in this challenging environment.
Want to know more? Download the full report.
The full The future of globalization report from Wells Fargo Investment Institute offers more insight and guidance for investors, including:
• Technology that’s driving the evolution of globalization
• Demographics that are reshaping consumption—and what it means for the markets
• The impacts of debt, population growth, and more