Super trend 2: Globalization in a post-virus world

WP presents a weekly series with Forstrong Global president and CIO Tyler Mordy highlighting and analysing seven macro super trends. In part two, Mordy turns his lens on globalization 2.0 and how the pandemic has accelerated a shift towards new patterns of connectedness. Don’t miss part 3 next Thursday when we’ll focus on Asia’s economic ascent. Missed part 1 on the dawn of the fiscal stimulus era? Click here.

The rise of protectionism and trade pullbacks prompted many to conclude that globalization had failed and was in reverse. Tyler Mordy, CIO and president of Forstrong Global believes, frankly, that they’ve missed the point. Far from back-pedalling, he believes globalization has merely shifted as new patterns of connectedness emerge.

Even before the coronavirus pandemic, traditional leading indicators had lost their predictive abilities. Manufacturing measures, for example, were often used to gauge the health of the global economy but post the 2008-09 crisis, Mordy told WP that these indices have repeatedly painted too gloomy a picture.

A major reason is that China’s rapid industrialization era is now over as a consequence of economic rebalancing towards more domestic consumption, reduced scope for productivity gains - as incomes rise and the pool of cheap labour from rural areas dries up - and demographic changes, as the country’s labour force peaks. Naturally, world trade volumes have been stagnant since 2017, not helped by Europe’s private sector deleveraging.

He argued that a plunge in worldwide manufacturing activity in the summer of 2019 was the third recessionary false alarm since 2008. By contrast, services-based indicators held up and were more reliable as barometers of the health of the global economy.

The rapid penetration of technology into a wide array of goods and services has increasingly been the most influential trend in global consumption and trade patterns. In fact, a global decline in discretionary spending has not occurred. Rather, consumption is shifting away from physical goods. Updates now come in the form of software and not hardware upgrades and digital flows of finance, data, video and other forms of communication have surged.

Statistics for these, Mordy said, do not always count in the export figures, so comparing global trade to the rapid industrialization phase is misleading.

The new global threat of COVID-19 has illuminated this trend. Suddenly, the world is connected like never before as people self-isolate and work together to stem a pandemic that has the world’s economy in a vice-like grip.

Mordy’s belief before the virus outbreak was that global trade isn't broken and that the loss of industrial tailwinds simply concealed these new patterns of connectedness. All COVID-19 has done, he stressed, is accelerate this trend and propel a new form of globalization post-virus.

He said: “It's more to do with technology. We’re shifting away from an industrial-heavy trade regime and into a more knowledge-based, digitized and services trade regime.

“Personally, I believe that there are many benefits to globalization; I don't think it's all negative. If you think about the sprawling web of people information and capital and the exchange of ideas that now covers the globe, that is not going to reverse anytime soon.”

It’s a message that seems to be resonating with CEOs of major companies around the world as they realise that individual productivity has not been affected by work-from-home protocol. And while Mordy admitted there will some “catastrophic” numbers initially from manufacturing and services because of the pandemic, he expects to eventually see a return to many of the trend lines that prevailed pre-virus.

“We are steadily moving towards a world that is more connected digitally, and more innovative in terms of production. This was already under way but the coronavirus just accelerated these trends.”

So, if the virus has poured rocket fuel on globalization 2.0, it’s important to understand the argument for the trend before social distancing became a way of life. Forstrong put forward a “simple fact”; that globalization has created enormous prosperity.

Mordy believes that, contrary to popular belief, worldwide living standards are rising faster than at any point in history. Although much work remains, material improvements have coincided with rapid progress in combating hunger, promoting literacy and extending life.

“Since the end of World War II, global economic integration was also widely seen as a force for peace. From the EU project, to Bretton Woods institutions, to the removal of capital controls and more frictionless national borders, a more interconnected world meant more international order and co-operation. A smaller world was better.”

He also acknowledged that it has a “dark side”: that distributed gains have been conspicuously asymmetric. Capital owners in the developed world have benefited enormously as corporate profits soared, while millions of manufacturing jobs have been created in developing countries and wages have risen dramatically.

He explained: “Particularly left behind is the middle class in the developed world. Household incomes have been stagnant for years. Unsurprisingly, a revolt against global integration is under way in the West. With the rise of populism, we have already seen the threat to established international organizations and to relatively free trade — staples of post-war political stability.”

Some believe that “peak globalization” has arrived. Even the UN is warning that “slobalisation” threatens to undermine progress. However, Mordy believes that moving from an era of liberal trade and open markets to one of growing protectionism would “mark the largest and most dangerous change in economic thought and order in decades”.

The biggest symbol of this antiglobalization backlash is, of course, Trump’s wall.

“Admittedly, it’s brilliant marketing,” Mordy said. “If only it were that simple. Populist movements have little to do with trade agreements of the last generation. The US economy was largely open by the Reagan-era of the early 1980s. Agreements since then reduced other nation’s barriers far more than America’s. China’s 2001 accession to the World Trade Organization is the leading case in point.

“According to a senior Chinese economist we met in Beijing late in 2019 the trade war is the most over-studied macro issue today. We agree. Tariffs are economically illiterate, prescribing bilateral remedies for more complex problems. Consider that America’s colossal trade deficit reflects imbalances with over 100 countries. In a world with globalized supply chains, slapping tariffs on China simply diverts trade to higher-cost foreign producers — the equivalent of a tax hike on US consumers.”

In addition, he argued, targeting bilateral trade ignores underlying causality. Linkages among ballooning budget deficits, low savings rates, consumption bubbles and the resulting trade imbalances receive almost no profile in these discussions. Even Chinese President Xi Jinping has warned against tariffs, likening protectionism to “locking oneself in a dark room” to defend from danger but also depriving the room of “light and air”.

The real reason for populist movements is much simpler, according to Mordy: the entrance of emerging markets as major participants in the global economy. “By far, the biggest macro story of our lifetimes is the emergence of 3 billion new consumers, producers, and savers.”

Crucially, and as this pandemic has illustrated, the globe is now connected by instantaneous cross-border dissemination of knowledge-based services — a once non-tradable sector. Once again, this is not something that will be reversed.

What does that mean for investors? Mordy expects commodities to remain in a wide trading range and generally underperform other growth-oriented assets, especially those in technology, finance and consumer sectors. Other trends also argue for a move away from hard assets, while the environmental movement has broad policy support across the world and will be boosted. Look at the effect currently deserted cities are having on air quality.

He said: “While the current US administration has created much divisiveness, the coronavirus has done the opposite: it has brought us closer together. When you are battling a common enemy like this, the world takes a giant step closer to unity. It’s a global problem that should be tackled through greater exchanges, integration and goodwill between all the three major economic regions of the world. That’s not happening in every aspect, but there's definitely some co-ordination happening.”

He added: “Looking ahead more broadly, investors need to reframe their view of globalization. When viewed through a knowledge-based lens, the outlook becomes far brighter. A lot of folks who think that globalization would go into reverse just didn't understand the different dynamics that were emerging.”