Has technology become an enemy of globalization?

By: Stephen Way and Andres Perez • March 28, 2018 • Investing

Restrictive trade policies and populist politics are growing concerns of investors who believe these developments to be serious hazards to globalization. But new technological advances in automation and artificial intelligence may be even bigger risks to the global economy’s interconnectedness and the impact on financial markets should not be underappreciated.

Once a key element in bringing the world together, technology has now become a catalyst for deglobalization through its growing influence on the global value chain and those who participate in it.

This is in stark contrast to much of the past three decades, when use of the internet and general connectivity sprung a period of “hyper globalization” highlighted by an increasing number of businesses gaining greater access to emerging markets and expanding production abroad.

The added benefits of lower taxes, cheaper labour and favourable credit conditions provided these mushrooming businesses with an arbitrage opportunity to manufacture goods more cost effectively than they could have previously in their own countries.

As a result, developed market multinationals have been able to generate better net margins and have often outperformed their more domestically-focused counterparts. Emerging market economies, meanwhile, have increasingly become the benefactors of investment flows and have gained a growing share of the global economy.  

But this rapid rise in globalization has waned more recently and may be reaching a tipping point. In large part, this is due to advancements in technology that are making local goods production more cost effective and global trading partners less compelling.  

Take Adidas, the global athletic brand giant, for example. The company has just built an advanced automated facility in Germany using 3D printing that promises to develop, manufacture and restock footwear in a matter of days, as opposed to orders from China taking many months, all with a fraction of the standard workforce. By improving efficiencies, localized production also has the potential to strengthen company balance sheets with reduced inventory/storage costs, lower capital spending, less cash outlay (and therefore improved working capital), shortened transition lag and overall improved return on invested capital. The downside is that easy access to technology such as 3D printing, which enables localized production, also lowers barriers to entry, potentially increasing competition as well.

From an investment perspective, this disruption to the global value chain has far-reaching implications, leading to a new set of opportunities and risks. Those who stand to benefit include companies with strong intellectual property and patents whose goods and services cannot be easily genericized. Multinationals with strong brands may hold up well too, but those without may find their exposure to the global value chain less advantageous going forward.

Other winners could include commodities and agriculture. Items like wheat and copper cannot be displaced by technology and can only be produced in specific geographies. Conversely, global shipping companies could suffer as international trade of manufactured goods declines and more localized production reduces demand.

The greatest impact, however, may be felt by emerging market economies, where participation rates in the global value chain are higher than anywhere else in the world. A silver lining for emerging markets may be that domestic consumption is increasing rapidly and moving online.   Key technology companies are based in emerging markets and increasingly becoming global players.

*Foreign value added used in country’s exports (upstream) plus value added supplied to other exports (downstream) divided by total exports
Source: Unctad, Barclays and AGF Investments Inc. as at March 2017.

Collectively, economies and their respective constituents can protect themselves from a disruption in the supply chain through strong domestic consumption and a highly-educated labour force that is equipped for technological change. Companies with high research spending and strong balance sheets may also benefit in this shifting environment from their ability to quickly invest in new technologies.

Like all inflection points, the technological forces influencing globalization are expected to have a considerable impact on financial markets regardless of the potential for trade wars and recent waves of populism that have spawned Brexit and other political movements around the world.

By positioning for a less connected global economy now, investors will give themselves a better opportunity to profit from it later.

 

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Disclaimers:

The commentaries contained herein are provided as a general source of information based on information available as of March 22, 2018 and should not be considered as personal investment advice or an offer or solicitation to buy and/or sell securities. Every effort has been made to ensure accuracy in these commentaries at the time of publication; however, accuracy cannot be guaranteed. Market conditions may change and the manager accepts no responsibility for individual investment decisions arising from the use of or reliance on the information contained herein.

References to specific securities are presented to illustrate the application of our investment philosophy only and are not to be considered recommendations by AGF Investments Inc. The specific securities identified and described herein do not represent all of the securities purchased, sold or recommended for the portfolio, and it should not be assumed that investments in the securities identified were or will be profitable.

AGF Investments is a group of wholly owned subsidiaries of AGF Management Limited, a Canadian reporting issuer. The subsidiaries included in AGF Investments are AGF Investments Inc. (AGFI), Highstreet Asset Management Inc. (Highstreet), AGF Investments America Inc. (AGFA), AGF Asset Management (Asia) Limited (AGF AM Asia) and AGF International Advisors Company Limited (AGFIA).

AGFA is a registered advisor in the U.S. AGFI and Highstreet are registered as portfolio managers across Canadian securities commissions. AGFIA is regulated by the Central Bank of Ireland and registered with the Australian Securities & Investments Commission. AGF AM Asia is registered as a portfolio manager in Singapore. The subsidiaries that form AGF Investments manage a variety of mandates comprised of equity, fixed income and balanced assets.

Publication Date: March 26, 2018.