Globalisation isn't dead
Part 1 of 'Re-Orientation'. Globalisation isn’t dead. It’s just being radically re-oriented, with Asia – the Orient – as its centre of gravity. That poses some crucial questions for investors.
Sep 15, 2021
Given the changing nature of global trade and the challenge to Western nations that China’s rise represents, the key question for investors is ‘what should I invest in?’, and its all-important antithesis, ‘what should I avoid?’. Within this overarching enquiry, there are subsidiary questions:
A given investor will likely have a unique answer to each of the above, depending on their circumstances, tolerance for risk, ESG (environmental, social and governance) priorities, and willingness to diversify globally.
But with that caveat, here are some general observations with near universal applicability:
Much value-creation will migrate from the physical to the metaphysical, from machine capital to intellectual capital. In the West especially, this will mean companies come to be valued more on their intangible assets than their tangible ones; so, broadly services much more than goods. But Asia will not be far behind in this trend. It already has a good number of companies that match this ‘metaphysical’ characterisation such as Ali Baba, Tencent and SEA*.
The production of a wide range of goods will commoditise, meaning that they cannot cover their cost-of-capital charge with their profits. Even services will face intense competition, including from artificial intelligence; so they may start to commoditise too. Don’t forget that low and even negative real interest rates are making many Western companies appear profitable: if financial repression were not lowering debt-service payments, these so-called zombie companies would be loss-making.
Investing in manufacturing sectors located in the West will become progressively more difficult, unless companies rely on locally-located automated and semi-automated factories.
Investing on the basis of a ‘cheap-labour’ advantage will become more difficult as factories face automation on the one hand and country-hopping driven by labour-cost arbitrage on the other.
Large domestic markets will confer global competitive advantages. That is, a quasi-protected home-base will, via economies of scale and clustering effects, help reduce base costs. This means products can then be sold abroad at competitive prices (a practice often dubbed ‘dumping’ by the final market). This will be a huge advantage for China.
Incumbent brands will be important but perhaps not as bullet-proof as before, especially as Asia’s middle class grows and favours brands more familiar in its part of the world and beyond; Chinese cellphones dominate not only their home market but the African market already.
Currencies will be key for investors to consider, especially if the US dollar’s reserve-currency crown starts to tarnish.
Investment indices will see significant weighting changes, particularly with regards to geography, in the coming decade. Broadly, they will shift towards the East at the expense of the West.
While China’s rise and consequent influence on global trade are likely to present headwinds for many Western businesses, some companies appear better placed to ride the tailwind of Chinese growth. The following are examples of the types of company whose business models may stand them in better stead than their peers.
Philip Morris International: this is a Swiss-based tobacco products company which owns the iconic brand Marlboro outside of the United States. It is the owner of the intellectual property behind the healthier IQOS system which heats rather than burns tobacco. PMI’s presence in Asia is strong: 34% of company revenues. However, Chinese sales are minimal: tobacco products there are made and distributed by a state monopoly. The IQOS system may yet bypass – legitimately – this Chinese monopoly.
S&P Group & Moody’s: with Western capital flows into China’s – and Asia’s – capital markets set to accelerate, the independent opinion of a well- established debt ratings’ agency from the West will be particularly valued.
ASML: even though China is determined to catch up in all areas related to microchip design and manufacture, the lead established by this Dutch multinational in the field of lithography – especially extreme ultraviolet lithography machines – will be hard for any follower to close in the coming decade.
Booking.com: with its knowledge of Western tourist facilities second to none, this online Dutch booking agency – with its 28m listings – is well positioned to benefit from the boom in overseas tourism emanating from China and East Asia at large.
Estée Lauder: this American cosmetics company – with a clutch of well-known brands – has expanded aggressively online and into Asia. In 2019, Estee Lauder bought cult Korean brand Dr Jart+, inventor of BB Cream.
Agilent: this American healthcare equipment and services company – the world leader in spectrometry – already earns 40% of its revenue from China. Strong in the sphere of hardware in providing analytical instruments, it reinforces its market position with software, services and consumables for the entire laboratory workflow.
Heineken: the Dutch Brewer – leading with the Heineken brand itself – has a significant share of Asia’s high-end beer market; Amstel is also one of its ‘global’ brands. Via Heineken Asia Pacific, it controls 45 breweries in 19 countries in the region, selling over 50 beer brands.
Schwab: With outside investment into Asia’s equity markets set to soar in the coming decade, this US brokerage has moved early and aggressively to secure its footprint in the region.
Diageo: this UK multinational is the world’s second largest distiller after China’s Kweichow Moutai, and the world’s largest whisky producer. It owns a number of iconic brands: Johnny Walker whisky; Gordon’s gin; Smirnoff Vodka; Captain Morgan Rum; Guinness Beer.
Nestlé: this Swiss company is the world’s largest food business. It has a strong presence in the baby food, medical food, bottled water, breakfast cereals, coffee and tea, confectionery, dairy products, ice cream, frozen food, pet food and snack segments. Its biggest brands are Nespresso, Nescafé, Kit Kat, Smarties, Nesquik, Stouffer’s, Vittel, and Maggi. It owns 23.3% of L’Oreal of France, the world’s largest cosmetics company.
LVMH: Louis Vuitton Moët Hennessy is a French luxury goods company embracing not just the high profile brands in its name: from Cloudy Bay wines to Christian Dior fashion and leather goods; from Givenchy Perfumes to Tiffany watches and Jewellery; from Hong Kong’s Duty Free Shoppers retail outlets to Belmond hotels. Its products are pervasive in the cities of Asia.