2021 Themes: Globalisation under threat and the markets that could benefit

2021 Themes: Globalisation under threat and the markets that could benefit

  • Globalisation doubled in the 30 years to 2007, but has since stagnated as leading economies pursue narrower agendas
  • Brexit and heightened China-US tensions are notable examples of this; the recent Abraham Accords are a welcome exception
  • EMs that could emerge as alternative suppliers include India, Mexico, South Korea; we identify stocks that could benefit

We find ourselves in an age where globalisation is facing growing threats, as major economies seem set on pursuing more narrowly defined agendas. Trade as a proportion of GDP, a gauge of globalisation, has stagnated since 2007; could it now reverse? And what would be the implications of such a shift for emerging economies?

World trade/ GDP ratio has ceased climbing since 2007

Nevertheless, fragmentation of global supply lines is not a foregone conclusion. Even as some doors to better global integration close, others are opening, with the recent normalisation of relations between Israel and the UAE being a notable example.

We examine these issues through the lens of four major trade dislocation developments:

  • Brexit

  • US-China tensions

  • The Middle East Abraham Accords

  • A potential India-Pakistan détente

Together, the markets directly affected by these events account for c65% of world GDP and affect half of the world’s population.

Realms of potential trade dislocations

In our view, emerging markets (and their leading corporates) can exploit disruptions in established supply lines arising from the dislocation events to gain greater access to foreign markets. Accordingly, their governments may wish to promote policies that foster trade and FDI; and their firms should ensure their products meet the regulatory requirements and consumer preferences in these new target markets. 

Brexit could benefit selected suppliers in China, India, South Korea and Taiwan

The UK government’s intention for the country to leave the European Union by the end of the year, with or without a trade deal, risks reversing that country’s increasing economic integration with continental Europe, a trend that has been taking place over the past 75 years. Today, c52% of the UK’s imports come from the EU. As we approach year-end, concerns about potential disruption to supply lines have led to stockpiling and congestion at leading UK ports.

From next year, firms in emerging markets may find themselves on a more level playing field versus European competitors and therefore better able to exploit any advantages they may have in terms of lower input costs or superior product features.

To help identify the main areas of opportunity, we examined trade data to identify products and services where:  

  • The UK is a material global importer

  • The EU currently has a significant share of these imports

For these goods and services, we then identified emerging markets with existing export capability.

Key goods falling within these constraints include aerospace, engineering, medicines, vehicles and wine.

Emerging markets with the best capacity to supply these goods include China, India and South Korea. The following table summarises our findings. In the Appendix, we drill down further to identify individual listed firms that could be geared to increased trade sales to the UK.

Potential EM beneficiaries of Brexit

Rising China-US tensions could provide support to the Mexican economy

Many factors are straining relations between the world’s two largest economies. On the one hand, we have China’s rapid rise as an economic superpower (it is now the world’s largest exporter) and its efforts to safeguard access to raw materials, and its rising military might and determination to enforce its territorial claims. On the other hand, we are seeing an erosion in the international competitiveness of the US and its traditional allies in Europe. Also, there seem to be important cultural differences between both countries, for example concerning personal freedoms, human rights and care for the environment.

These factors suggest that, even though a more multilateral approach is likely to be taken by its incoming president, the US will continue to actively seek alternative suppliers to China. Potentially, this opens up big long-term opportunities for other emerging markets, given that China currently supplies c20% of US imports.

Industries where China is a meaningful supplier to the US include: electronics, engineering, clothing and vehicles.

One of the major beneficiaries should be Mexico, given its geographical proximity to the US and its existing status as a major supplier to that country (supplying just under 15% of all imports). Other key beneficiaries include South Korea, Thailand and Vietnam.

EM beneficiaries of heightened China-US trade tensions

For equity investors, however, the challenge is that there are few listed vehicles in Mexico through which to capture this theme; much of that country’s production capacity is owned by foreign firms. Instead, investable names in the relevant industries are primarily located in Asia, notably in India, South Korea and Taiwan. We present some of these businesses in the Appendix.

The Abraham Accords

Earlier this year, Bahrain, Israel and the UAE signalled their intention to normalise relations. This could open up trade, capital and worker/tourist flows between the three nations.

For Bahrain and the UAE, their main exports are hydrocarbons. The relatively small size of the Israeli economy is unlikely to have much of an impact on this sector. A more meaningful area of potential cooperation is the diamond, gold and jewellery trade; both Israel and the UAE are significant global actors in this space. The UAE’s status as a major transhipment location (given its strong air and sea port infrastructure, and favourable tax environment) may also benefit as a result of these accords. However, in each of the above cases, it is difficult to find a listed UAE or Bahrain vehicle through which investors could gain meaningful exposure to improved relations between the three countries.

A better route is likely via the Israeli stock market. Key products that the UAE imports where Israel has production capacity include aerospace, engineering and medicine. Selected firms with exposure to these industries are presented below.

Sectors and stocks beneficiaries of the Abraham Accords

India-Pakistan trade has vast growth potential

India and Pakistan share a c3,000km border; particularly in Punjab, many population centres are close to the border. Yet, trade across this border accounts for just 0.7% of India’s exports, and 2% of Pakistan’s. If more cordial relations could be established between both countries, the economic benefits could be huge. For example, India’s trade with Bangladesh is c3.5 times higher than with Pakistan.

Comparing existing import needs and export capacity in both countries allows us to pinpoint where these trade opportunities are likely to be concentrated. Tourism and transport infrastructure are likely to benefit from higher demand. Agricultural efficiency could improve if each country can focus on growing its most competitive crops. Both markets also have scope to increase trade in financial services, IT services, petrochemicals, textiles. India could also see benefits to its car manufacturing, engineering and pharmaceutical industries.

Given the relative sizes of both economies, the percentage upside for Pakistan firms listed below could be greater, but they are typically smaller and less liquid stocks than their Indian counterparts.

Potential beneficiaries of increased India-Pakistan trade

Appendix 1: Identifying EM stocks that could benefit from Brexit

Large-cap EM stocks that could benefit from higher sales to the UK following Brexit are largely concentrated in China, India, South Korea and Taiwan. A selection of potential beneficiaries is presented below.

Potential EM beneficiaries of Brexit at the stock level

Appendix 2: Identifying EM stocks that could benefit from heightened US-China trade tensions

Large-cap EM stocks that could benefit from increase China-US trade tensions are predominantly located in India, South Korea and Taiwan. Some examples of firms that could benefit under such a scenario are presented below.

Potential stock-level beneficiaries if China-US trade tensions were to rise

Read all of our 2021 Global Themes here.

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