In this article, Simon Wood, Co-Manager of the IFSL Marlborough Global SmallCap Fund, shares his insights on deglobalisation.
Although the term didn’t enter the mainstream until the latter half of the 20th century, globalisation is far from a uniquely modern phenomenon. Among others, the traders and explorers of Ancient Egypt, the Roman Empire and the Islamic Golden Age were all pioneers of interconnectedness.
Equally, deglobalisation is by no means novel. Logic dictates that something akin to it must have taken place when each of the above eras fizzled out – not to mention during the economic chaos of the 1930s, the emergence of the Soviet bloc after World War Two and on other many occasions.
On balance, the assumption has almost invariably been that globalisation should be seen as a force for positive disruption and deglobalisation as quite the opposite. This explains why the current drift away from multilateral international relations is routinely met with dismay.
Yet the distinction needn’t be so clear-cut for investors. Provided we seek to understand and take advantage of its implications – rather than simply bemoaning the gradual loss of a world without borders – it’s eminently possible to profit from deglobalisation.
The arena of smaller companies can make for an especially happy hunting ground. In our opinion, few corners of the investment universe – if any – better exemplify the importance of thinking differently in the face of potentially seismic geopolitical and geoeconomic upheaval.
From peak globalisation to a new age of self-reliance
Before examining its effect on smaller companies’ investment appeal, we need to place the recent trajectory of globalisation and deglobalisation in perspective. This requires us to wind back a little over 35 years.
The fall of the Berlin Wall sent globalisation into overdrive, triggering rapid regime change across Eastern Europe and elsewhere. It led to the dissolution of the Union of Soviet Socialist Republics and a new chapter in economic assimilation.
In tandem, ever-accelerating technological advances increasingly helped bring about “the death of distance”. It had never been easier to do business, and more countries than ever before were only too delighted to weigh in. The cracks, though, would soon start to appear.
The spectacular global downturn of 2007-2008 showed unprecedented financial and commercial integration was not without its perils. Although the system survived the crisis, the pace of cross-border trade and capital flows plateaued. A period of “slowbalisation” ensued. Once seemingly entrenched, the cause of globalisation began to falter.
The UK voted for Brexit in 2016. Donald Trump’s first spell in the Oval Office brought further fracturing. The COVID-19 pandemic dramatically reshaped supply chains. Russia’s invasion of Ukraine followed. Earlier this year, as if to cement a new reality, major conflict returned to the Middle East.
Industrial policy takes centre stage
The above might sound remarkably like a catalogue of woes. In many ways, of course, that’s precisely what it is. Meltdowns, lockdowns, breakdowns – such a succession of shocks is hardly to be welcomed.
Yet investors must respond to such developments pragmatically. Regardless of whether the backdrop is one of globalisation or its antithesis, the main question we have to ask ourselves is this: where are the brightest prospects to be found?
The first point we ought to acknowledge is that deglobalisation doesn’t necessarily herald disaster or even disappointment. A recognisable measure of “business as usual” normally endures, even if it’s conducted under new rules, agreements or allegiances.
What deglobalisation does tend to bring is a critical shift in focus. When the trend is towards greater self-reliance, as is the case at present, industrial policy becomes paramount.
Ultimately, each economy must strive for a level of independence and resilience which safeguards against further shocks. This is likely to be reflected in more emphasis on areas such as energy, infrastructure, technology, defence and aerospace, as well as a heightened appetite for “made at home” policies.
Domestic strength and picks-and-shovels opportunities
So where do smaller companies slot into this picture? It doesn’t require a genius to figure out that some are likely to benefit from the more domestic outlook to which market fragmentation gives rise.
Take Mueller Industries, an American business centred on piping and industrial metals. It has a dominant position in the US across much of its product range – and it also happens to be our fund’s biggest holding.
Perhaps less appreciated is the vital role that smaller companies play in the sectors and industries mentioned above. Energy, infrastructure, technology, defence, aerospace – all rely on “picks-and-shovels” businesses to underpin the far-reaching transformation happening all around us.
Mueller certainly fits this bill, as do Canada-based Hammond Power Solutions, which manufactures transformers and other electrical equipment; Germany’s Thyssenkrupp, which specialises in industrial engineering and steel production; and Danish cable maker NKT, which is tapping into the energy transition. We hold them all.
It can be very tempting for investors to think deglobalisation somehow shrinks the investment universe. It really doesn’t. It simply compels us to view the sphere of equities through another lens – one capable of revealing new opportunities that are every bit as exciting as those that existed before.
