Here at Absolute Return Partners, our portfolio construction is driven by the six structural megatrends that we have identified. With that in mind, something we constantly look at is whether these megatrends are still in motion and whether there are any new megatrends we should be considering. This leads me to one particular trend that we have been thinking about. The end of globalisation, ‘slowbalisation’, or rather a new era of globalisation.
Why have we been thinking about this? Because globalisation has lost momentum over the past decade. This is evident when looking at the Trade Openness Ratio, which represents world trade as a proportion of global GDP. This metric has been trending downwards since the Global Financial Crisis (see Exhibit 1). There are also other measures that support the slowbalisation phenomena – decreasing global bank loans, foreign direct investments and multinationals’ market share.
There are a few factors that could be blamed for the slowdown in globalisation. The most important is that most of the economic gains from lower costs had been reached. Transport costs have declined since the 1960s due to greater efficiencies and better technologies. As a result, international trade became a lot more profitable. Now, and for the last decade or so, transport prices have been rising on the back of rising fuel prices, which has massively decreased the profitability of international trade.
The improvements in technology is also a factor in its own right. There was a lot of offshore manufacturing taking place. US and European companies had an incentive to utilise cheap labour in low-cost countries to significantly reduce their input costs. However, manufacturing became more automated and labour costs as a proportion of total costs fell. There is now a reliance on more skilled and technologically able workers over cheap and plentiful. This has meant that companies have begun to move their operations back onshore, which has reduced the need for goods to be transported around the world. It’s also worth noting that there has been a clear shift from manufacturing to services. As incomes rise, we have tended to spend more on services, which can’t be imported, than on goods.