Perspectives On World Trade

The Future Of Globalization

Investing in an inter-connected world

New report from Wells Fargo Investment Institute addresses the nature of globalization, the evolution of trade in consumer goods and services, increased information and innovation, the demographic impact on trade, and emerging risks and subsidiary trends. Download the complete report here.

SAN FRANCISCO–(BUSINESS WIRE)–Wells Fargo Investment Institute (WFII) today released a new thematic report, “The Future of Globalization – Investing in an Interconnected World.” Over the next decade, WFII expects that innovative technologies will continue to forge even greater global connectedness, but that new investment opportunities will emerge with the changing composition of trade and its destinations.

The report addresses the nature of globalization, the evolution of trade in consumer goods and services, increased information and innovation, the demographic impact on trade, and emerging risks and subsidiary trends. The report also outlines ways in which geopolitical tensions and protectionist trade policies will influence the mix between domestic and international portfolio allocations.

“The familiar pattern of extended supply chains fragmented across multiple low-wage production centers appears to be evolving towards more concentrated, high-tech, and regional trade,” said Paul Christopher, head of Global Market Strategy for WFII. “We believe the reshaping of global trade will present broader and persistent opportunities in traded services and new technologies, but that supply chains will be shorter and focused around Asia and the U.S.”

The report addresses key questions for investors to consider:

  • How may globalization evolve and create opportunities for investors?
  • Which economic and geopolitical forces may shape future globalization?
  • How may technological innovation help drive these trends?
  • What risks may impede globalization and which investments may benefit?

The report also outlines three international trends that can help investors as they prepare to reposition their portfolios over the next decade:

  • Globalization favors the U.S. and parts of developing Asia over other regions of the world
  • Certain sectors should benefit from expanding automation and services trade
  • Centrifugal forces will remain, but investors have potential hedges

WFII strategists favor a larger exposure to the U.S. than international markets and international exposure that favors emerging markets across China, India, and Southeast Asia.

Inside The Report:

The Nature of Globalization

WFII considers globalization the interdependence that arises as goods, services, people, and information cross borders and encourage globally integrated markets. For example, smartphone components could leave factories in South Korea or Taiwan for assembly in China, and then the finished products cross the Pacific to the shelf of a U.S. retailer.

In John Muir’s words, when one “pulls” open the production process for everyday items, one quickly sees complex and interconnected production processes.

Key Takeaways on the Future of Globalization

  • 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 towards more concentrated, high-tech, and regional trade. 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.
  • 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 who will 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 protectionist policies in these and other countries, may require firms to undertake sudden shifts in production centers and deepen their knowledge of local consumption patterns. This will compel multinationals to rely on technology and local knowledge to remain flexible. U.S. IT and Consumer Discretionary firms are well- positioned to compete in this challenging environment.

The Evolution of Trade in Consumer Goods

Trade in manufactured goods perhaps has been the most obvious place to see the churn between centripetal and centrifugal forces of 21st century globalization. A rise in nationalistic sentiment has sparked a more active role for governments in protecting local industries from offshore competition. From 2018 to 2019, the U.S. and China ratcheted up tariffs on each other’s goods, and worldwide, government subsidization is a rapidly growing trade- protection strategy.

When one “pulls” open the production process for everyday items, one quickly sees complex and interconnected production processes...

Moreover, China is becoming one of the world’s largest consumer markets, as government policy favors local production for local consumption. Together, protectionist and self-sufficiency policies historically tend to regionalize trade by focusing production, consumption, and trade around the world’s largest consumer markets — the U.S., China, and India. We believe this is a key trend. There is some evidence that the trend is already developing, as global goods trade slowed perceptibly following China’s 2012 policy change to emphasize domestic consumption, and especially after the U.S.-China tariff escalations since 2018.

Technology Helps Drive Operational Decision-Making

As knowledge enhances productivity, manufacturers are turning to highly skilled labor, reducing multilateral exchanges in intermediate products and facilitating regional production. Robots and autonomous processes replace low-wage labor, allowing production to return to developed countries or near the large consumer markets of the U.S., India, and China. Meanwhile, digital platforms and high-speed data processing reduce transportation and financing costs.

Some examples include:

  • Robotic tools and autonomous vehicles have automated the ports of Rotterdam in the Netherlands and Caofeidian off the northeast coast of China.
  • London’s Heathrow Airport launched an autonomous baggage-handling vehicle to ferry baggage between planes and the terminal.
  • Blockchain, the foundation of cryptocurrency trading and transparency, replaces some paper contracts, executes immediate payments upon receipt of goods, and is less vulnerable to fraud than traditional contracts and payment methods.
  • Powerful icebreaker container ships can transport electronics from Busan, South Korea, to Hamburg, Germany, via the North Sea in half the time it takes to sail around the Cape of Good Hope.
  • 3-D printing, sometimes called additive manufacturing, does not substitute for mass production but can save time by replacing parts on a construction site or in a factory.

The Contours of 21st Century Globalization

Geographically, WFII favors U.S. large-cap equities first, then equities in parts of emerging Asia (especially China and India). The confluence of centripetal and centrifugal forces likely will change the contours of globalization but not end it. Specifically, globalization will transition from a model focused primarily on providing goods for Europe and North America toward regional trading hubs of production and consumption with increased production-to-consumption in the U.S., China, and India. Services are also poised to assume greater importance in global trade. Innovative technologies should reinforce the trends toward services and regional trade.

Three International Investment Trends:

Globalization favors the U.S. and parts of developing Asia over other regions of the world

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. The next generation of technological advances may encourage some manufacturers to return to the U.S., but these firms are likely to require a workforce with advanced technical skills and will not simply restore the millions of assembly-line jobs lost during the past 25 years.

WFII 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. They 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

Their expectation for 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. U.S. IT and Consumer Discretionary firms are well-positioned to compete in this challenging environment.

Download the report “The Future of Globalization,” and read “The Big Rethink: Globalization in the Age of the Coronavirus” on Wells Fargo Stories.

 

 

 

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Wells Fargo Investment Institute is a registered investment adviser and wholly owned subsidiary of Wells Fargo Bank, N.A., a bank affiliate of Wells Fargo & Company, providing investment research, strategy, manager research, and thought leadership within the Wealth & Investment Management division, with the goal of supplying world-class advice to the company’s financial and wealth advisers.