Work evolved in the same sense, with outsourcing, cheap international travel and conference calls changing our lives. Emerging markets became more integrated with the West as their products ended up on the shelves of global chains, while their growing wealth led them to adopt some Western tastes. The European Union probably integrated most, as epitomised by the Erasmus university exchange programme, and the inter-rail train pass allowing for borderless travel within the EU with a single currency.
However, research suggests that globalisation in developed markets stalled after the internet bubble burst. Emerging markets continued to integrate for a little longer, but the trend seems to have stopped there too, following the credit crisis. The world, in other words, has stopped becoming more global, at least for now. Although globalisation may not be making a U-turn, the speed of global integration seems to be slowing, and it may be taking different forms around the world.
Trade unions and the anti-globalisation movements are not new, but they are getting some help from unexpected areas.
Weaker global trade
In 2015, global trade experienced the biggest fall in decades. China’s slowdown has a lot to do with this, as its imports and exports shrunk. The downturn in commodity prices and global overcapacity in manufacturing led prices to fall, resulting in negative inflation for producer prices. In fact, global trade continued to grow very slightly in volume terms, but fell once price effects are taken into account.
For investors, it is important to realise that manufacturing is more negatively affected by the slump in trade and falling prices than services are, as these are typically more local. Unfortunately, manufacturing is over-represented in equity indices, accounting for 68% of S&P 500 earnings, but just 14% of US employment. Comparatively, the services sector is much healthier than manufacturing across the developed world, leading us to prefer companies that focus on domestic demand, especially in Europe.
Another beneficiary may be Mexico: somewhat slower growth in global emerging markets is leading companies to re-onshore or, in the case of the US, to produce close to home and look at Mexico. The local Mexican economy is benefiting from rising remittances from Mexicans living in the US, due to strong US housing activity and healthy employment growth in small US businesses.
Stalling integration in the EU
Until recently, the EU has been a champion of integration and friendship, but the question now is whether UK voters, in particular, will vote to remain a member of the EU in the referendum, which is to be held by the end of 2017. Polls suggest that if the prime minister is able to present improved membership conditions, people would want to stay in, but that otherwise, the result will be hard to call. This uncertainty could lead to fears over inward investment and potentially damage growth expectations. This could put downward pressure on sterling and lead to underperformance of UK equity markets relative to global indices.
In the EU, politics will be at the forefront in 2016, with security issues, immigration and the rise of the opposition on the left and the right, all challenging incumbent governments.
While this may challenge investor and consumer sentiment, we believe that the recovery in Europe is healthy enough to withstand these pressures, especially with the help of continued support from the European Central Bank (ECB). Government spending should rise but we do not think that this will significantly affect the credit quality of sovereign issuers in the area.
We continue to prefer Eurozone credit markets and equity markets over their US counterparts.
Globalisation, emerging market style
Slowing growth in China and reduced money flows into emerging market (EM) economies and funds have collectively stalled globalisation there, but we believe that some forces may continue to lead it to integrate in the medium term. ASEAN (Association of South East Asian Nations) is a group of 10 countries with 627 million people, including Indonesia, Malaysia and Singapore. It recently signed an agreement for further integration, which should lead 30% of its goods trade to be between member nations by 2020. Similarly, the recent Trans-Pacific Partnership agreement between 12 countries of the Pacific Rim may lead to increased trade with the US in coming years.
China’s increased focus on consumption, coupled with strong wage growth in the region, lead to the development of a rising middle class. Urbanisation tends to boost consumption as well, and with mobile-centric shopping dominant in Asia, we believe that companies that can cater to the rising Asian middle class will benefit. Together with the ageing consumer in developed markets, the emerging market middle class is a force to be reckoned with, reshaping global products and services, global demographics and global spending power.
More connected… via the net
One area of globalisation is alive and kicking, and in contrast to many old and mature manufacturing industries, it is young and vibrant. Indeed, we find it hard to foresee any slowdown in internet traffic and its multitude of applications in real life. According to Price Waterhouse Coopers, 90% of the data that exists today was created in the past 2 years and the ‘Internet of Things’ is likely to lead to around $1.7 trillion in spending this year.
Retailers find their competition globalised and it is ferocious. However, we think that software and mobile device companies should benefit from network convergence and greater mobility. In summary, many of the rules about the world are being re-written.
European integration may be stalling, while it is still progressing in Asia. Manufacturing may become less global while the network economy keeps us well connected and the consumer is likely to be older, or increasingly come from an emerging market.