Stop the roundabout, I want to get off!

Posted by Liz Rees in Latest insights category on 26 Sep 18

Globalisation seems to be blamed for a lot of the current shortcomings in society so I thought I would take a look at who it helps, who it harms and where it’s heading. It has many aspects but can be broadly defined as the process of interaction and integration between people, companies, and governments through a global network of trade, communication, immigration and transportation.

The term was first coined back in the 1960s but to understand its development we need to delve further back in time. In many respects, the process started with the industrial revolution, when mass production became possible, allowing companies to export as well as satisfy domestic demand. Transportation networks were also put in place to open up new markets; previously it could take many years for new inventions to be adopted around the world.

The UK was a major beneficiary of these advances; there was a shift in employment from the countryside to the cities where higher wages eventually led to a better standard of living. Assisted by links with the British Empire, the country became a major industrial force in the world. Fast-forwarding to modern times, globalisation picked up momentum due to improvements in distribution and communication networks. Instant interaction across continents has accelerated the expansion of international trade, innovation and culture.

Given that more transactions involve intangible (non-physical) assets these days, it is much easier to ‘go global’ at the press of a button instead of having to spend time building factories abroad or facilitating exports. Take Facebook for example; the basic structure of the service is the same anywhere in the world, making it very easy to scale up the business. And Uber doesn’t have to buy fleets of cars when it enters new markets; it just upgrades its software.

I don’t think there’s any doubt that the corporate sector, in particular companies with products or services possessing international appeal, has been a clear winner from these trends. This has contributed to the healthy returns for stock market investors over the long run with sectors such as technology and consumer brands leading the way.

So what’s not to like? For many years, globalisation seemed to work for the benefit of all but since the Financial Crisis this has been increasingly questioned. Many are asking whether, with growing trade tensions and threats of further tariffs, it has peaked or is even set to reverse.

While Britain was long a beneficiary from globalisation, with its goods in demand around the world, the ultimate outcome has been a shifting of jobs to areas where it is cheaper to manufacture, both in terms of raw materials and labour. As a result, the new winners are workers in Emerging Markets which have experienced their own industrial revolution, progressing from basic assembly to employing more advanced production techniques and owning technology and patents.

Scientific progress is an important driver of incomes and living standards but clearly does not always work to the advantage of everyone at the same time, if at all. The developed world has had to contend with structural changes in the employment market, including automation, temporary job contracts and income stagnation. As a result we have seen the rise of political populism from both the left and the right, with parties speaking for those left behind because they are not the owners of capital.

Populist movements in Europe have focused on opposing immigration on grounds of social, economic and cultural threats, aggravated by the refugee crisis. In Italy, the new coalition government, between the Northern League and the Five Star movement, is using immigration worries to challenge the EU on all matters. The Italian stock market has weakened to reflect the perceived increased political risk. Immigration concerns were similarly a factor in the Brexit vote.

Donald Trump was elected on promises to improve the lot of blue collar workers. The United States is escalating tariffs on Chinese goods and Trump has accused China of stealing US intellectual property. The President may be satisfying his supporters with his ‘Make America great again’ policies but it isn’t really helping those who reside elsewhere.

What does it all mean for investors? Globalisation has rewarded many of their investments. These may be companies in developed markets with aspirational brands or ground-breaking technologies sought after around the world. Alternatively, they may be companies in Emerging Markets manufacturing products to satisfy burgeoning demand.

So should we trust or reject globalisation? To sum up, I would conclude that investors, multi-nationals and consumers have been clear winners while a sizeable part of the workforce are losers (of course these categories may overlap). Technology seems to assist the high-skilled more than the low-skilled, while muted global growth has held back the investment that should produce productivity gains and real wage growth.

We are seeing the fall-out extend to politics and the harmony of international relations. Growing uncertainty over trade wars further dampens the confidence of companies to invest which remains a risk for investors; co-operation not protectionism is needed if global trade is to flourish. Governments, therefore, need to adopt policies to ensure that the benefits of globalisation are shared fairly amongst the population.

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