From Globalization to Localization: Ten implications

LONDON (Capital Market in Africa) – What’s behind the ongoing move from globalization to localization? Continued automation, national security concerns, nationalist political pressures, tariff walls, and diminished tax arbitrage, recovering the tacit/embedded knowledge in outsourced supply chains, the heavy carbon footprint of traded goods/services, flattening transport costs, the reduced provision of trade finance, and the tendency of aging societies to consume services. The “trade/tech war” only exacerbates this trend.

1) We think EMs – the biggest beneficiaries of prior globalization – will likely be most challenged by its reversal. EM ROEs, down from 17% in 2007 to 11% now, will remain under duress. EMs contiguous to the US or Europe (like Mexico, Poland, etc.) will benefit, while the rest will need to rely on domestic sectors.

2) Competition between great powers and more localization will likely boost the defense industry – a fountainhead of innovation. Like prior periods of military/strategic competition (WWI, WWII, the Cold War), expect path-breaking scientific progress.

3) For those on the fence like India, Australia, Singapore etc. with equally important links to both the US and China, choosing a side will become inevitable.

4) China itself will still grow impressively with its own regional ecosystem/Belt-and-Road Initiative but see its Schumpeterian innovation constrained by restricted access to Western expertise. It will still offer tremendous scope for stock-pickers, especially in healthcare, asset management, the local amusement economy, affluent/ upper-middle-class consumption, environment, defense, and indigenous innovation firms.

5) Ageing DMs will demand more knowledge-intensive services, and stand to benefit the most. Brainpower and brand power will win, muscle power and labor arbitrage is yesterday’s story. Knowledge/service-oriented economies like the UK, Sweden, and France stand to gain. Germany, Japan, and S. Korea, reliant on exports of capital equipment and autos, will face stiffer competition from China, and from new tech.

6) Among DMs, the US is a clear winner as it has a massive edge in “tacit” knowledge and substantial oligopoly power. Indeed, since 2008, when globalization peaked out, it has averaged an ROE of 14%, well above Europe (11%), Asia (12%), and Japan (7%).

7) Multinationals that depend on EM demand growth for their EPS growth could also face challenges, especially in the tech sector.

8) Financing will be local, relying on domestic savings and local financial firms, products, and systems. The monopoly of the US dollar (62% of world allocated reserves) and the SWIFT payments system will be challenged by alternatives from China/Russia.

9) Worries about rising consumer price inflation (CPI) from sub-optimal outsourcing will likely be unfounded since CPI is largely driven by domestic services, not traded stuff.

10) Light industrial goods (clothing/toys), accounting for only 3% of global output and employment, will likely shift from China to alternative locations like Bangladesh, Vietnam, Ethiopia, India, and Indonesia.

Source: BofA Global Research