Opposing forces of globalization
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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:
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?
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.
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.
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.
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.
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.
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
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
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.
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.
Important conclusions and implications for investors.
We believe that crosscurrents in technological, economic, and political forces likely will change the contours of globalization but not end it.
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.
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.
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.
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.
The full The future of globalization report from Wells Fargo Investment Institute offers more insight and guidance for investors, including: