Five Factors Overpowering The Globalization Backlash | American Funds

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Robert Lovelace
Robert W. Lovelace Portfolio Manager
economic outlook

Five Factors Overpowering the Globalization Backlash

Key Takeaways

  • Political posturing over trade has raised questions about the future of globalization in commerce.
  • Powerful forces of technology and economies will likely transcend any disruptions caused by political trade negotiations.
  • Irreplaceable companies forged by global competitive advantages are creating durable winners despite the direction of political winds.

What will global trade and commerce look like in the coming years, and how will it influence the investment landscape? It’s a question that’s been top of mind for investors, as the current administration in the U.S. seeks to renegotiate relationships with key economic partners.

While negotiations of this type are unpredictable, the outcomes need not be extremely positive or negative for one side or the other. In fact, in many ways, it’s the advancement in technologies and how they reshape industries that will determine the future of global business as much as political negotiations.

No matter what develops — be it a trend or a cycle — we remain positive on what’s happening with global trade and see five categories that seem durable.

 

Factor #1: Digital Trade Is Beyond the Reach of Policy

The contours of international commerce have been profoundly redrawn over the past two decades. If the 20th century was defined by a phenomenal rise in the transfer of goods and industrial commodities, the 21st century is being characterized by the rapid digitization of services and the increasing automation of manufacturing.

Cross-border digital traffic surged in the last decade, and it’s only projected to increase over the next seven years. Trade agreements have limited power to curtail the digital economy, meaning trade negotiations will likely be less severe for technology companies than, say, manufacturers.
 

Data Traffic Has Been on the Rise as Digital Trade Grows

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Factor #2: Global Powerhouses Cannot Be Easily Uprooted

Supply chains are deeply entrenched across the globe and, if broken, those chains cannot be easily replaced by domestic players. As they’ve become global, companies have gained specialization and scalability that is difficult — if not impossible — to replicate.

The most obvious example may be Apple. Motivated by a need to scale and manage supply chain risk rather than cost, Apple is a master of using a large supply chain to its advantage. It sources suppliers that can turn out parts in the most cost-effective way while still adhering to the company’s quality requirements.
 

Apple's Supply Chain Spans the Globe

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In some industries, companies are willing to absorb higher costs because the long-term benefits of certain locations outweigh the near-term burden.

 

Factor #3: China Is a Massive Market. That’s Not Changing

Over the past decade, China has become the largest growth market in the world for industries ranging from robotics and autos to airplanes and smartphones. In 2015, it accounted for 27% of global sales of robotics, 30% of elevators, 32% of autos and 16% of Boeing’s airplanes.

China’s rise as an economic power will continue to have a profound impact on global trade. China’s relationship with the U.S. is multidimensional, deep and interdependent. The U.S. trade deficit with China was $347 billion in 2016, with exports at $116 billion and imports at $463 billion. A large chunk of the imports are from U.S. manufacturers that have set up assembly lines and factories in China.
 

China Has Become a Major Driver of Earnings for Companies Worldwide Firms with exposure to China have outpaced broader markets and China-domiciled firms.

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Factor #4: The Rise of Emerging Markets Entrenches Globalization Further

Thanks to China’s influence, emerging markets have increased trade both among themselves and with developed economies. In 2015, 30% of developed-market exports went to emerging markets, and 46% of the trade by emerging markets was among themselves, according to the latest figures from the International Monetary Fund. Emerging markets’ share of global GDP has risen significantly. The greater trade participation by these countries creates an even more complex trade fabric that cannot be easily unraveled.

As the global economy gains momentum, the role of emerging markets in global trade should become even more important. Already, we have seen a recovery in profit growth. Earnings for emerging markets companies are estimated to increase 17% in 2017, led by information technology and industrials, according to FactSet.
 

Emerging Markets Are Gaining a Greater Share of Global Trade Across a Host of Goods and Services

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Factor #5: Automation Makes Global Trade Fluid

The ability of companies to move resources around the world to optimize efficiency is an essential element of globalization. Investment moves to where the greatest opportunity exists, offering companies the flexibility to make adjustments over time.

For instance, labor cost differences between countries have been a big motivation for global trade for decades. The low cost of Chinese labor has given the country an advantage for 30 years. But the situation is changing, as wages rise and younger workers become less willing to do repetitive tasks. This is just one example of how a country’s competitive advantage can change, requiring companies to move and adjust quickly.

Automation is likely to further diminish the importance of labor costs. For instance, of the more than 250,000 industrial robots sold in 2015, a quarter of them were sold to China, according to the International Federation of Robotics. With fewer cost advantages remaining in China, production may move closer to end-markets, which is something globalization allows. It is this transformation in the economics of labor that could bring manufacturing and jobs to the U.S.
 

Industrial Robots Are Finding Their Way Into Factories Worldwide

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Don’t Fear Globalization. Position for It

Global trade patterns will continue to evolve and present opportunity to money management firms with the global research capabilities needed to identify the most attractive options wherever they are. 

Shifts in economic and trade regimes and turning points in markets provide managers like us the opportunity to capitalize on short-term distortions in asset prices and to invest in companies that we view to be winners in the long term.

 


 

Robert W. Lovelace is vice chairman of the Capital Group Companies, president of Capital Research and Management Company, Inc., part of Capital Group, and serves on the Capital Group Management Committee. He is also an equity portfolio manager. Rob has 31 years of investment experience, all with Capital Group. Earlier in his career, Rob was an equity investment analyst at Capital covering global mining & metals companies and companies domiciled in Mexico and the Philippines. He holds a bachelor’s degree in mineral economics (geology) from Princeton University graduating summa cum laude and Phi Beta Kappa. He also holds the Chartered Financial Analyst® designation. Rob is based in Los Angeles.

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