The big rethink: Globalization in the age of coronavirus
Learn what technology and the coronavirus pandemic may mean for globalization over the next decade.
Over the past 25 years, I have lived and worked in, and taken fact-finding research trips to Europe, Africa, Asia and Latin America, often with my colleagues from the Wells Fargo Investment Institute. It’s interesting to see how much the world has changed but at the same time how some things have stayed the same.
Technology has been driving global trade and opportunities for investors
From Stockholm to Singapore, and places in between, I’ve come to see the rapidly growing global trade in services as part of the international opportunity set for investors. The tremendous expansion of the internet globally really drives this trend.
For example, inexpensive, high-quality telecoms make customer service centers available at any time of day, while online entertainment almost instantly spreads the latest music video or TV series instantly over computers or phone screens around the world.
More importantly, technology allows new ways to trade services. For example, technology is becoming more embedded in goods; think electronics that run everything from cameras to cars to kitchen appliances. This means that services such as research and development (R&D), engineering, sales, and marketing can increase sales across borders.
Leasing is another example of international service trade that is now easier for businesses and even households; think about booking websites that allow travelers to book bed-and-breakfast accommodations before they leave home.
Trade is just as important as ever, but the composition of trade is changing
Trade is still creating jobs, profits, and investment opportunities, but services trade is growing faster than goods trade. Investors who want to take advantage of this trend may need to be more selective and focus especially on the U.S. and, next, China, India, and increasingly Southeast Asia.
This geographical selectivity potentially offers investors a strong advantage that investments in the rest of the world likely will struggle to match over the coming decade. What’s more, these geographic preferences align well with recent additions we made to our strategic allocations in U.S. Large Cap and Emerging Market equities.
Many of the S&P 500 Index sectors that we expect to outperform in a post-pandemic world, such as those focused on technological innovation, already have some of the largest weights in the Index. Most notable are Information Technology, and Consumer Discretionary, and Health Care. A more cyclically oriented sector, such as Industrials, also may benefit.
And there are other trends at work: The pandemic has resulted in what I like to call “the big rethink”
Broken supply chains, a realization that some overseas industrial supply chains are more strategically important and more vulnerable than we had thought, and the politics of the pandemic are leading to a reassessment of goods trade across the globe. The U.S. and Europe have identified critical industries, for example those providing basic health care supplies such as cotton swabs and personal protective gear, that need to stay closer to home.
Moreover, as U.S.-China competition heats up the political rhetoric, China has prioritized national self-sufficiency for its technology and consumer goods needs. As a result, the share of global trade in manufacturing output has been shrinking and we are seeing a rise in local or regional production and trade networks. These departures from the global trade networks of the past 30 years reinforce our more regional and selective approach to international investment.
What will a new face of globalization mean for investors?
So how quickly will these conflicting trends change the global investment landscape over the next decade? The trends appear strong and are producing crosscurrents in global political thinking unseen since the 1990s. A new face of globalization is emerging. Amid this turbulence, we are focused on selectivity in geography and in sectors.
To learn more about our view of the future of globalization and what it means for you as an investor read our new report The Future of Globalization: Investing in an Interconnected World (PDF).
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