NewsIs Slow-balization substituting for Globalization

Globalization has dominated the world economy for years. But recent trends are indicating that many major economies are turning their backs on being drawn deeper together. The signs are that there’s a growing desire to be less inter-connected through global networks of capital flows, trade, and technology.
Global trade is becoming less advantageous. There are even cases where it is also on the way to being less feasible.
This is a major turnaround for what in the last half a century had been seen as the prevailing trend that would inexorably move in the same direction.
What is conspiring to slow globalization? The combination of geopolitical shifts, secular trends and trade tensions are just aspects of this story.
Tariffs are a very visible barrier to global trade, but other hurdles, including the US’s foreign investment review, are also diluting any business incentive to globalize, according to senior bankers.
In addition, changes in consumer preferences along with greater purchasing power in emerging markets are boosting regional trade over global trade. Technology is exacerbating these trends by enabling leaner manufacturing methods. The highly acclaimed Dutch trend watcher Adjiedj Bakas calls it “slow-balization”.
When it comes to investment, there are advantages and disadvantages. Barriers to global trade threaten to disrupt major businesses that rely on smooth flows including capital goods, semiconductors, telecoms, and automobiles - indeed any industries where technologies are sensitive and whose supply chains are globally diffuse.
However, increased localization may turn out to be a bonus for those businesses that don’t rely so heavily on foreign markets, and whose products have a critical economic or national security interest. Good examples of these “emerging regional champions” are China’s internet firms, and local payment processors as well as some smaller US internet operators.
Globalization Goes Into Reverse
Even before trade tensions began to reassert themselves, secular winds of change were already blowing. 
About 20 years ago, transportation and communication costs were decreasing and long-haul trade across the world’s oceans became prevalent. McKinsey Global Institute research shows that between 2000 and 2012 the share of goods traded between the same region’s countries dropped from 51% to 45%. This trend is now reversing and regional trade is again gaining traction.
Underpinning this are two things. Goods trade is now growing less fast than service trade. And the success of globalization has led to emerging market countries growing rich enough to be consuming more of the very goods that they have been selling.
In hindsight, it’s a natural evolution of globalization, and, according to McKinsey, the consequence is that between 2007 and 2017 the share of output moving across the world's borders has dropped from 28.1% to 22.5%.
Trade Patterns Change Shape
Trade patterns are also being encouraged to change. McKinsey reports that the old lean manufacturing approach emphasizing low inventory levels -“just-in-time” logistics – is no longer as popular as it once was.
Now just 18% of the world’s goods trade is founded on labor-cost arbitrage. Indeed, McKinsey expects this share to shrink further as companies streamline their supply chains and adopt more automation.
This is very different from the turn of the century when a large number of businesses based decisions about supply-chains on the ability to source low-cost labor, even when it meant shipping supplies, components and finished goods all over the world.
A final aspect that is also making globalization less attractive is technology. Countries are now thinking differently about the link between economic interests and their national security. The US, for example, is now defining its sensitivity in a much broader manner.
So, taking automobiles as an example, the technology on which driverless cars depend is highly likely to have military applications, and the US doesn’t want foreign powers – least of all China – having any knowledge or influence in this field.
Taking Advantage of Slow-balization
Shifting tides create complex dynamics, but investors can still start thinking about the broad implications by seeking answers to a couple of key questions:
  • How sensitive is a business’s product to a particular country's economic or national security?
  • What is the reliance on global supply chains, and does this make sense anymore?
Those businesses that are most vulnerable to the effects of “slow-balization” are the ones dealing in economic and security sensitive technologies and still depending on a supply chain that is globally diffuse. Think European capital goods, autos, telecoms, IT hardware, and semiconductors.
It’s less easy to assess internet companies. While the biggest consumer internet businesses are facing higher costs of doing business because platform health and data security are playing bigger roles, smaller rivals could find they benefit for similar reasons.
It’s highly likely companies dealing in sensitive areas, but not closely entwined with the rest of the world, will be better placed. China’s internet firms, for example, are vital for that country's economic security and outlook but their business has been focused almost exclusively on China itself.
Another area that is worth considering from an investment perspective is payments. Payment firms could be net beneficiaries because they are tuned into issues of tax collection and banking functions as well as national security, while digital payments is unstoppable irrespective of global trade. As a result, payment schemes that are domestically developed could get the edge.
Environmental, Social and Governance (ESG) Drivers of Investment
Today as high as 80 percent of all global energy demand comes from fossil fuels. This includes primarily oil, natural gas and coal. Investors are increasingly looking for options that integrate environmental, social and governance (ESG) factors, thus providing sustainable investment avenues.
Last year, financial managers invested over $3 trillion in sustainable assets that factored in climate change and carbon effects, according to the US SIF: the Forum for Sustainable and Responsible Investment.
In fact, the total value of funds that have integrated ESG factors into their investment process has quadrupled since 2014 to $485 billion as of April 2019, according to data provider EPFR Global and the Wall Street Journal.
All across the board from hedge funds and sovereign wealth to private equity, exchange traded funds (ETFs) and mutual funds, investors and financial asset managers are beginning to plan for both profit and loss affected by climate change over the long term. Interestingly enough, a drive to earn the highest returns while minimizing risk has become the impetus for investing sustainably, more than any conscientious objections to fossil fuels. Large funds such as BlackRock Inc., that manages over $6 trilllion in assets, have launched their own sustainable equity ETFs and are actively identifying clean energy investment funds that are potential winners in the future.
Investing in Clean Energy
While investment based on new models for clean energy and mitigating climate change poses risks, it is increasingly being adopted by funds worldwide that are eager to adapt and to also benefit from the shifting tide towards clean energy.
Investments in clean energy fuels have surged in the last three years, particularly in the Asia-Pacific region, but also worldwide.
Global Energy Consumption
Energy consumption has grown considerably due to both economic and population growth in the Asia-Pacific region. Today China is the world’s largest energy consumer, followed by the United States and then large emerging economies such as India and Indonesia, according to data compiled by Bloomberg over the last forty years. Almost all this energy is fueled by fossil fuels that release carbon dioxide into the earth’s climate.
Demand for Oil in Emerging Economies
Oil demand worldwide has surged to meet growing population demands in Asia, rising by 1.2 million barrels per day (mbd) every year for the last 28 years, according to data from International Energy Agency’s New Policies Scenario (IEA NPS). There are roughly 1.1 billion cars around the world today that are all powered by oil. The number of cars on the road in the future is expected to rise by as much as 80 percent by 2040. Oil as an asset class will continue to provide positive returns in these regions. While geopolitical factors such as OPEC control over oil pricing and distribution and lobbyists continue to exert strong influences over oil consumption, other polluting fossil fuels such as coal may be on the way out in the next two decades as harnessing natural gas and renewable energy sources continue to expand.
As electric vehicles (EV) become more mainstream, technology becomes more efficient leading to less energy waste and clean energy options become more viable, the demand for oil and gas is expected to go down in the next 20 years. The demand for electricity for transportation is expected to increase at 7.2% compound annual growth rate (CAGR) from 2017 to 2040 as compared to oil at a 0.6% CAGR over the same period of time.

Reining in
Carbon Emissions

Carbon pricing as a market approach to rein in carbon emissions from greenhouse gases is a proposed policy method to limit the spread of hydrocarbons from greenhouse gases through a “carbon tax.” A carbon tax is a cost paid by a consumer for using energy derived from fossil fuels such as oil, coal and gas. Using a carbon tax is meant to account for the “real” cost of energy consumption.
It is also meant to discourage consumers from using products that emit a lot of pollution. Emission cap and trade programs consist of a fixed number of “carbon units” that are paid for by firms and can be traded among firms while setting a cap or limit on the quantity of total emissions allowed in a region or country.
According to the World Bank, 46 nations and local governments are pricing carbon, raising $20 billion last year. 1,400 companies that include more than 100 Fortune 500 companies with returns of over $7 trillion, are also factoring in an internal carbon price to their business plans.
Implementing carbon taxes has faced strong opposition worldwide, resulting in many governments adopting the less effective cap and trade method. Carbon taxes have been adopted in several Western European countries, Canadian provinces and South Africa while cap and trade programs have grown in popularity in Australia, China and New Zealand.

Global Plastic Consumption

In 2017, BBC aired the TV episode "Blue Planet II” narrated by Sir Richard Attenborough that brought awareness to plastic pollution particularly in the oceans. 12 millions tons of plastic litter the oceans annually, accounting for 80 percent of all marine pollution. Awareness in Europe rose exponentially after this documentary, leading to institutional and government changes that included more recycling options and banning single-use plastics such as straws, cotton buds and cutlery by 2021. Companies like P&G, Unilever and Pepsico with large global footprints have committed to waste recycling. Consumer awareness is driving the change as consumer preference has shifted towards reusable and sustainable plastic product choices.

Plastics Recycling and Packaging

Using plastic products responsibly requires an understanding of the product lifecycle from how the plastics are produced, distributed and then managed after consumer use. As consumers step away from using non-recyclable plastic common in Fast-Moving Consumer Goods (FMCG) sold by supermarkets and chain stores, investors are taking note. This has resulted in increased investment in biodegradable plastics.
Companies and investors are also looking for alternative packaging options that are easier to recycle such as corrugated cardboard, which has grown in popularity due to e-commerce. Demand for corrugated cardboard is expected to reach $700 million between 2018 and 2022, according to DS Smith, the UK global packaging company.
Government at both the national and regional level have been influencing changes in the packaging industry by demanding the use of recycled material. The EU is considering implementing a “producer pays” regulation where companies that use plastic packaging, pay for its recycling and also to clean up affected beaches littered with plastic.
China, a major importer of global plastic waste, decided to no longer purchase plastic waste in 2018, disrupting the global recyling industry. This move and government pressures by nations is pushing many companies to improve their recycling efforts. Offering incentives to recycle can also accelerate a shift to using more sustainable packaging options.

Making Capital Work for the Benefit of All

At Bear Stearns, we are committed to providing sustainable investment solutions for our clients and within our own firm, reducing plastic use, eliminating single-use plastic consumption, offering recycling solutions and encouraging energy efficiency at our offices. We work with our client’s investment banking and asset management services. Get in touch.

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