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July 2019 | John Butler, Macro Strategist

Deglobalization revisited: Seven macro directions

Globalization has in many ways defined the modern economic system for the past 30 – 40 years. It is now under threat.


The US-China tension is one very visible illustration of this reality, but this trend towards deglobalisation has been in place since the start of the financial crisis. For instance, it’s notable that global trade (as a share of global GDP) has been flatlining for 10 years now, after rising on a continual basis for over 30 years.

There will still be economic cycles, but this structural theme of deglobalisation is changing the nature of those cycles and the underlying trends they oscillate around. This is a clear frame break from the past and will be played out over multiple years. While we will likely see an ebb and flow, driven by the broader dynamics of the economic cycle, the path is clear and concerning for economic growth.

So where do things go from here? In this post, we share seven macro directions related to the theme of deglobalisation. The long-term investment implications of these trend breaks are clear, but over a cycle, how markets respond will depend on how policymakers respond. We believe these responses will likely vary across countries and be much less synchronised than in the past.

Direction #1

We believe corporate investment spending will become MUCH less synchronised across countries.
Globally, capital spending has been driven for nearly three decades by multinational companies. As a result, global capex trends have been highly synchronised and correlated, irrespective of a particular country’s cycle. Global foreign direct investment has also been high. This trend is now fading and will reverse. Larger variations in capex cycles across countries will depend on differences in national growth trends and fiscal policy, rather than global dynamics.

Direction #2

We believe the level of inventories held by corporations will be structurally and persistently higher, tying up a greater proportion of corporate cash flow.
Inventories as a share of GDP have been on a declining trend for many years and are now reversing. Greater uncertainty about supply chains will require companies to hold a higher level of inventories (or lengthen delivery times) and tie up a larger proportion of corporate cash flow, impacting the types of credit lines banks need to offer. There are also implications for storage and logistics.

Direction #3

In our view, economic cycles across countries will become much less synchronised.
Similar to (and partly because of) capex cycles, the variance of growth across all countries has been incredibly low and falling for the past 30 years. Deglobalisation will break that trend as growth rates between countries widen again. Market opportunities will require getting the relative country stories right — and not just the aggregate global growth story (i.e., not just global capex).

Direction #4

Savings will become less internationally mobile.
The recycling of global savings will slow sharply, thereby reducing global liquidity. Global current account surpluses will narrow and banks (which have been the primary facilitators of capital movement) will see a drop in their global foreign claims. This hasn’t yet begun. However, these savings and surpluses are no longer in China, Japan or the Middle East but in Europe and European banks — which means the strain of this shift will be felt most in Europe.

Direction #5

We believe inflation trends will change.
Global inflation has been structurally lower and less responsive to national growth metrics for many years, in large part because of globalisation. A reversion from global to national/local output gaps and resource constraints plus lower productivity and growth trends will ultimately raise the rate of inflation. However, this transition is potentially deflationary as it could trigger a new wave of bank deleveraging and tests of credit/fiscal sustainability. All of this implies greater inflation volatility and a worsening trade-off between growth and inflation (or a tighter real-to-nominal inflation spread).

Direction #6

We believe global productivity and country-level returns will stay lower than in the past.
This trend is already in place and will persist. Given higher costs and weak revenue/growth trends going forward, this will raise questions for many companies and some countries about their debt levels. Lower trend growth implies lower global corporate revenue growth and lower cash generation. Many highly indebted “zombie” companies that have been kept alive through persistently low interest rates will struggle to survive.

Direction #7

In our view, the profit share of income will fall structurally in most countries.
This was both a policy objective and part of the reason behind the trade wars. Globalisation and the free movement of capital meant developed market workers lost much of their bargaining power. The voter wants it back, even if it means higher structural unemployment and lower growth.

What does this all mean from a macro investing perspective?

Our view is that these trend breaks will induce much greater economic and financial market volatility as well as much more cycle and policy differentiation between countries. This should result in higher real yields, higher inflation and higher institutional risk premiums attached to certain assets. Lastly, I keep coming back to Europe as being most vulnerable to these potential outcomes.

Please see the important disclosure page for more information.

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