Deglobalization: Successful Investments in a Shrinking World

By means of George Sweeney

The world is changing. The Federal Funds rate is at its highest level in 22 years. The proposed “transitory” inflation sticks like gum on the bottom of your shoe. Supply chains around the world are shifting and, in most cases, shrinking as everyone moves closer to home.

All of these macroeconomic changes are making the world smaller, and that’s not necessarily a bad thing for investors — if you know where to look. Although deglobalization will take a transition that presents many challenges, there is a lot of potential money on the table for motivated investors.

Schroders labeled the reshuffling of the global economy as a “3D Reset” – decarbonization, demographics and deglobalization. In the wake of Covid-19, geopolitical tensions are emerging around the world. As a result, deglobalization means that businesses are looking to strengthen and protect supply chains, even at higher costs. Along with “reshoring,” we will also see more “nearshoring” and “friendshoring,” which will lead to a wave of opportunities for investors.

Why deglobalization will create investment opportunities

It is no longer a race to the bottom for manufacturing and supply chains. We are coming out of a period of maximum efficiency leading to a deflationary environment with falling prices. It may sound doom and gloom, but outsourcing supply chains to the lowest bidder creates a house of cards that is difficult to control.

Prices are rising, but this opens the door for a stronger economic relationship based on more than just low prices. Shifting supply chains and importing from China means all that money and investment is needed to find new homes. And this is where investment opportunities present themselves.

Decoupling from China while relations remain strained means the US is likely to develop more profitable partnerships with countries such as Mexico (3.2% GDP growth in 2023) and other Latin regions. America. What’s even better is that as China’s economy matures and shifts from a producer to a consumer, it will also look to pump money into these regions, along with places like India (6.3% growth of GDP) and Southeast Asia.

How investors can benefit from deglobalization

All this change acts as inflationary pressure, but it also creates a lot of potential growth for investors to use. Although we will likely see more onshoring, where business and manufacturing return to the US, creating wide profit margins will be difficult. Business costs will undoubtedly increase, and pockets of efficiency will be rare.

Investments with the most potential for growth tend to come from nearshoring and friendshoring. As a slightly fragmented version of globalization, you won’t see the same low prices anytime soon, but there may be alternative developments. For example, more trade with friendly neighbors and countries means fewer tariffs on imports, which should lower prices, increase demand and benefit the US and its allies.

Find investments as the world changes

For investors, your challenge is to pick the regions or companies that come out on top as the aftershock of deglobalization ripples around the world. To invest broadly, consider exchange-traded funds (ETFs) as a starting point.

A broad Latin America-focused ETF that tracks major companies in these regions can be beneficial. Examples include the iShares Latin America 40 ETF (ILF) and the Franklin FTSE Latin America ETF (FLLA). Or there are broader passive options like the Columbia EM Core ex-China ETF (XCEM) and the Freedom 100 Emerging Markets ETF (FRDM) — among others.

However, a decent case can be made for active management and investment funds that use local knowledge and expertise to pick stocks that may see the most volatility due to deglobalization. Popular active options include the BlackRock Emerging Markets ex-China Fund (MKECX) or the Fidelity Emerging Markets Discovery Fund (FEDDX) – although the latter has some exposure to China.

The silver linings of deglobalization

The investment landscape feels a bit rocky right now, but volatility is expected to have more changes. A big change can cause short-term pain, and you may be feeling that right now in your daily spending and your investments. However, these seismic changes can open up many possibilities for expanding your portfolio as the world shrinks.

Bad news largely overshadows these silver linings. But if you keep an eye on the long-term results, you may find this to be a valuable opportunity for your investment portfolio.

The views and opinions expressed herein are those of the author and do not necessarily reflect those of Nasdaq, Inc.

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