For some years, we have had a deglobalisation theme. This reflects a general realisation, particularly in the West, of the downsides of offshoring the production of many critical elements of the economy. This has accelerated in recent years with the decoupling of the west from China and Russia, at least from a narrative point of view.

While there has clearly been a major recovery in industrial investment in the USA, the evidence of a real decline in the interconnectedness of the world economy is scant. If anything, China’s export trade appears to be accelerating, although perhaps more of its exports are going via Asia and Mexico to then be re-exported to the US. The same can be said for Russian energy exports. There is no discernible decline here, they are simply being redirected to other markets and either re-exported back to Europe or transferring the advantage of cheap Russian gas from Europe, particularly Germany, to markets such as India and China.

Source: CNFREXP Index (China Export Trade) and Bloomberg – 04/07/1994 – 26/06/2024

The net result of this is that the biggest loser from deglobalisisation is Europe, which has lost much of its competitiveness, especially in energy intensive industries. The beneficiaries are the US and, ironically, China and also India and Mexico among the bigger economies.  Perhaps this was predictable and even the intended outcome, the US has abundant low-cost energy and labour and so while not necessarily competitive with emerging economies, is certainly competitive with Europe. This is particularly so given Europe’s strict labour and environmental regulatory regimes.

Looking forward, we still consider this deglobalisation period to continue, but perhaps the most obvious effects are already known and priced in. The bigger question is where the beneficiaries of the global trade regime are going forward. The issue will always be one of comparative advantage, which on the big picture scale comes down to resources, energy and labour (cost and skill).

One clear long-term winner appears be India. India has a huge and growing workforce, 100 years’ worth of coal reserves and cheap oil and gas coming cheaply from Russia and central Asia. Politically, India appears determined to exploit these advantages, while neither aligning itself too strictly with either the West or the rest.

From a market point of view, the Indian stock market has gone from being an irrelevant backwater to something of an emerging market darling, particularly as China has fallen out of favour, but we retain an exposure albeit reduced.

The deglobalisation theme will no doubt throw up numerous opportunities regionally, but the key in the near term may be the extent to which armed conflicts escalate. China has repeatedly stated it has no intention of invading Taiwan, despite the US putting troops on Taiwanese islands close to the Chinese coast. Similarly, the Ukraine conflict has ground to stalemate, which suits Russia more than it does the West, hence the risk of escalation.

Our deglobalisation theme has been very successful over the past few years. Firstly, as it is a major driver behind our higher for longer inflation stance, this has led to our short dated fixed income positioning. Secondly, our reshoring basket in the US has been one of our more successful positions. Going forward, we believe this trend has the potential to lead inflation to reaccelerate, and to raises the possibility of further conflict. As a consequence, we retain our long term higher for longer stance in fixed income, although moderated with short term deflationary forces. Alongside our US industrial exposure, we have also built a defence exposure as defence spending seems bound to accelerate into the future.