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Coronavirus outbreak reinforces de-globalisation trends

9 February 2020

The era of De-globalisation is clearly upon us, as companies realise the risk strategy of relying on China for manufacturing and growth, suggests David Jane, multi asset fund manager at Premier Miton

For many years we have been of the view that the era of globalisation was coming to an end, to be replaced by a greater emphasis on local production. The drivers of this were many. Initially, it was the rapid maturing of China, thus reducing its comparative advantage in production. This was followed by improving manufacturing technologies which make production in the developed world more competitive with cheap labour economies. A further development was the world’s changing energy mix. The move towards renewables and away from fossil fuels reduces the advantage of low labour cost production combined with high transportation costs, versus automated production close to end markets. Transportation is highly dependent on fossil fuels.

More recently, these trends have been compounded by political forces, driven by the fact that the big losers from globalisation have been working class voters in developed nations, leading to a much more aggressive approach to global trade by the current US administration. The era of De-globalisation is clearly upon us. It is interesting to reflect how far we have come in the last few years from China being the great growth opportunity, to an urge to decouple.

Further compounding the desire to decouple has been the realisation that favouring nations with very different views about human rights, privacy and the rule of law to that of the liberal west is not necessarily in the West’s interest.

We were wondering how the recent coronavirus outbreak in China would impact these already in force trends. On a human level, numerous Western companies have executives at manufacturing operations in China. They and their families are now facing the reality of living in a totalitarian state first-hand. Pictures of locked down cities and enforced house arrests of suspected victims make you realise what a very different society it is. It is hard to imagine UK authorities locking down whole cities and introducing curfews.

At the same time, many other companies will be experiencing supply disruptions with numerous factories across China remaining closed. It must be becoming increasingly clear to companies in the West that relying on China for manufacturing as well as for sales growth is a risky strategy in this new environment. Further decoupling seems inevitable.

We have no material exposure to global trade related stocks or China, preferring new economy growth situations. Hence, our immediate impact from the economic disruption is limited. We are, however, concerned that the market is being a little complacent as to the second-order effects of disrupted supply chains and reduced demand. Anecdotally, we hear of massive reductions in Chinese tourists, and retailers in Japan are already issuing profit warnings. Although these impacts will be temporary, the current virus is spreading much more quickly than SARs and China is much more integrated into the global economy than back in 2003.

Given that markets have been extremely strong recently, it is surprising how easily they have shrugged off what may prove a global economic shock, preferring to focus on the further infusions of free money, now from the Chinese, as well as recent positive economic news. The long-term impact will only reinforce the current trends in our view. Developed western markets look increasingly attractive, particularly those companies which fit into our preferred themes of digital economy and renewable energy. While ‘old economy’ stocks such as natural resources and basic industries will continue to suffer under the weight of declining Chinese growth and a preference for environmental sustainability.

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