Is big picture small beer?

Great debates on longer term economic trends and the impact on financial markets are often a go-to conversation with investors. Few call up to ask what is the discount rate or cash flow yield, but many have opinions on issue such as debt and globalisation. The latter is a tough topic as globalisation is a throw-away term. It can encompass much more than trade by raising topics such as income disparity, migration, labour standards, currencies and unfair competition. Traded goods are referenced with compelling visuals such as Ship Map, while in services, education or travel are the inevitable top of mind sectors. Yet, hardly any industry is unmoved by the interaction with other regions. Many ignore the big impact global wholesale funding had on our banking sector in the pre-2008 period which went some way to explain their high return on equity. Retail, a domestic activity, has become a conduit for imported product in the case of discretionary spending while supermarkets have changed their modus operandi since the entry of Aldi. Most food brands are owned by foreign conglomerates where their strategy or required return on investment may be at odds with local requirements. Today the focus is on supply chains, protectionism, the US tech transfer tension with China, Europe’s efforts to reign in the power of the US internet giants and a wide number of geopolitical disagreements that boil into the corporate sector.  Brexit and US tariffs are symptomatic of the underlying pattern. If it is correct that globalisation is now in abeyance, will this have a notable impact on investment markets? There is currently a plethora of fund manager commentaries which attempt to nut out the issue. Many note that global goods trade and capital transfers had already slowed some years back while technology, ideas and people movement had become the newer forms of globalisation. This is the likely source of change, hastened on by COVID 19. It’s reasonably safe to assume international borders will be restricted for a considerable time and that migrant levels be restrained by government limitation. Technology is already in the spotlight with a general conclusion that two blocks will become entrenched. The US with its Amazon, Google, Facebook and payment systems and China with Alibaba, Tencent, Baidu along with its 5G network. Investors may wish to lean on the comfort of the known US names, but the China-based groups have the advantage of newer technology and can skip some of the dated processes still deeply entrenched in the developed world. The new game of globalisation is yet to play out. Will healthcare providers be required to provide local product, will there be more inventory so moving away from just-in-time, will lower levels of international skills transfer result in an advantage for some nations? Fund managers will have plenty of scope to prognosticate on any of these, while their portfolios and processes are likely to shift at a snail pace. That may be the right approach. Short sharp dislocations such as the Kuwait War or even the Greek debt crisis are quickly swept away. The speed of COVID 19 may become the same. But they all leave a legacy that directly or indirectly influences the big themes. To build a portfolio today that assumes globalisation is in the past jumps too far ahead. These concepts are written up as though they require imminent action and even though are reflected in global growth and investment opportunities, they are but one element of a portfolio.

Contributor