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Globalisation Reset: Which Economies And Markets Stand To Benefit?

Globalisation reset: which economies and markets stand to benefit?

Globalisation reset: which economies and markets stand to benefit?

With the end of this global economic cycle, and regime shift, there is a theme which has increasingly captured the attention of markets and investors. “Nearshoring”, “reshoring”, “onshoring”, “supply-chain diversification”, “friendshoring”, “slowbalisation”, “de-globalisation”, even “re-globalisation” have been terms used to frame this theme. Whichever the term, these all encompass some form of potential disruption to the era of globalisation that began in earnest in the early 1990s. Breaking down different stages of production, often locating them in different economies/geographies, provided benefits such as lower costs, economies of scale, specialisation, and higher efficiency. Globalisation saw a sea change in manufacturing production, with China becoming so dominant that it is often referred to as the factory of the world. The global Covid-19 pandemic exposed some of the risks and vulnerabilities of this approach. The lockdowns in China in 2020 were the beginning of a multi-year period of global disruption, dislocation, and bottlenecks. Geopolitical tensions between the US and China, which pre-dated the pandemic, only re-emphasise these risks. A natural response from multinational companies (MNCs) is to diversify and improve the security of their supply chains. In the initial era of globalisation, efficiency and cost were prioritised. Today, the focus is shifting to resilience and reliability. With China now at the heart of global manufacturing, the natural question for investors is to look at which economies and stock markets may benefit from potential disruption and re-wiring of globalisation. Ultimately, given China’s dominance, any changes are likely to involve a re-allocation of supply chains away from the country. Which economies might be beneficiaries of changes or diversification of supply chains? According to our research – the detail of which is in the full paper available here – the majority of the top 20 economies are emerging market economies. Our scorecard suggests that India is the most attractive market for MNCs looking to diversify their manufacturing exposure. By 2028 it is forecast to offer the largest pool of working age labour. Other factors supporting its ranking are the relatively lower labour costs and relatively high productivity – albeit this is measured at the total economy level. Productivity for tradable sectors such as manufacturing is difficult to find, and likely to be weaker. However, India scores poorly on business freedom. Vietnam is the second ranked market. Relatively low wage costs, competitive productivity, and working-age population all make the economy an attractive destination, even if the business freedom ranking is less favourable. South Korea ranks well, underpinned by its business freedom ranking and productivity scores. Regional peers Thailand and Indonesia also feature, with wage costs and demographics supportive. The frontier markets of Bangladesh, Kenya and Pakistan rank in the top 20 in large part due to their lower wage costs and favourable demographics. Central and eastern European markets also feature in the top 20. These are led by Poland, but Germany, Romania, the Czech Republic, Lithuania and Hungary are also present. Productivity is an important driver of the ranking for most markets. Business freedom is also supportive. Mexico, often cited in relation to nearshoring, ranks 17th. Competitive wages and demographics are its main supports. Germany and the US also rank relatively highly, with high levels of business freedom making up for more expensive labour costs. Of course, a scorecard approach has its limitations, which we discuss in the paper. For example, Mexico’s proximity to the US is not captured. Who are the potential winning markets? Opportunities differ by market. In developed markets, opportunities may be more smart manufacturing related, centred around the intersection of manufacturing and technology. By contrast, opportunities in emerging markets and Vietnam (a frontier market for equity investors) may be more labour intensive manufacturing. It should be noted that if China were included in this diagram, it would feature in that centre segment. This emphasises China’s continued attractiveness as a manufacturing destination, even if some MNCs may be motivated to reduce their reliance on China. The figure below highlights the stock markets which stand to benefit in terms of: – a top 20 ranking in our economic assessment – stocks which are potential beneficiaries – ability to build a semi-diversified strategy: more than 10 stocks in an index Those in the sweet spot are South Korea, Germany, India, Indonesia, Mexico, Poland, Taiwan, Thailand, USA and Vietnam. How can you capture these potential opportunities? The re-wiring of globalisation is a theme which active managers within the emerging markets space should be well placed to capture. The majority of markets flagged as winners are emerging […]

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Daisie Hobson

Daisie Hobson is a Director at the Reshoring Institute and an engineer with many years of experience in manufacturing and project management.

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