By Andrey Dashkov, analyst, Casey Research
The days of fast-growing global trade are over.
And that’s a good thing.
The pandemic proved that stretching supply chains across the world makes them vulnerable.
A lockdown in Shenzhen, for example, means that goods produced in China can’t get to their global destinations.
This is a consequence of businesses being obsessed with cost cutting… at the expense of everything else.
Cost cutting works well when the global economy runs like clockwork.
But the last two years proved that it doesn’t.
From the pandemic to the war in Ukraine… we have seen one economic shock after another.
So the pre-pandemic, cost-cutting approach has backfired.
The goods produced offshore are cheaper, yes. But if you can’t deliver them, they might as well not exist.
Bottom line is, we’re in a different world now.
And you need to understand this situation to position yourself for maximum profit.
Has the Global Trade Stopped?
It hasn’t stopped and most likely never will.
For instance, the post-pandemic recovery that sent prices soaring was, in terms of economic growth, a good sign.
It’s much better to see demand for goods soar than stagnate or disappear altogether.
But there has been a trend unfolding for about ten years now…
And, in my view, it will accelerate in this decade and beyond.
The index measuring globalization has been in decline since the Financial Crisis of 2008-2009. It shows global trade as a percentage of the world’s GDP.
“Global trade” here means the world’s total exports and imports of goods and services. And world GDP, or gross domestic product, is the total value of the goods and services produced worldwide.
So the chart below shows how much of the world’s total production is either bought from abroad or sold across the border. If goods didn’t move across the border at all, the chart would show zero. But in reality, about one-half of the world’s total output crosses borders.
But this share is in decline. See for yourself.
Put simply, global trade as a percent of GDP peaked in 2008.
What does it mean? And how do you profit from this trend?
More Resilient Supply Chains Will Be Shorter
The era of globalization made “just in time” manufacturing popular.
As a reminder, “just in time” production involves little or no inventory. Parts are delivered to manufacturing plants just in time for assembly.
For example, McDonald’s doesn’t have an inventory of pre-cooked burgers in its restaurants. The “manufacturing” process only starts when the company receives an order. This ensures that every burger has a buyer, and the company doesn’t need to deal with waste.
The “just in time” method applies to various industries, but the underlying logic is the same. Keeping inventories as low as possible is good for working capital and cash flow purposes.
Toyota pioneered this approach in the 1970s. Which coincided with the explosion of global trade, as the chart above shows.
But now, businesses are switching away from this method.
They want to have a predictable supply of raw materials and parts.
This will involve larger inventories. And since it’s easier to ship something from a nearby city or a country, supply chains are getting shorter.
Think of it like this: Toyota used “just in time” to produce cars. If it needed entertainment systems to put in its cars, it would order them as soon as the car rolled off the production line.
Otherwise, it would need to store them elsewhere, which drives up inventories and reflects negatively on financial statements.
But now Toyota needs to plan in advance, because its suppliers of entertainment systems can’t promise in-time delivery. This is due to delays like the widespread chip shortage or temporary lockdowns in major shipping ports.
So the global economy works more like an airplane now.
For example, airplanes have more than one hydraulic system to extend the landing gear. If one fails, the other one kicks in.
If airplanes were built for cost efficiency, they would be lighter and cheaper. And more prone to emergencies.
The global economy of 2022 is like an airplane. The supply chains that keep it going need to have support built in to make sure it doesn’t crash.
Hit by one shock after another, the world needs stability. It needs support.
To profit from this “less global” economy, countries trading with major economies like the U.S. or the European Union need to be close.
And they need to be reliable partners.
Like Mexico or Brazil.
In fact, developing countries could get a boost from the global supply chain realignment.
They tend to have lower labor costs, which encourages major manufacturers to build production facilities there.
Who Will Be the Biggest Winners of De-Globalization?
As I said, developing countries with lower labor costs located near major economies and markets.
Larry Fink, the head of the $10-trillion investing giant BlackRock, mentioned Mexico, Brazil, and Southeast Asia as the most likely candidates.
As a result, I recommend looking at two ETFs.
The first one is iShares Latin America 40 ETF (ILF). It holds 40 of the largest Latin American companies, including Vale (a natural-resource multinational corporation), and some of the region’s largest banks.
This ETF is a great way to gain exposure to the Latin American region, which will benefit from de-globalization and higher demand for goods in the U.S.
The other one is Global X FTSE Southeast Asia ETF (ASEA). It provides access to public companies in Singapore, Malaysia, Indonesia, Thailand, and the Philippines.
Some Chinese manufacturers have already started moving production facilities there.
As the de-globalization trend accelerates, these countries could see a period of growth.
Analyst, Casey Research