Deglobalization, Technology and Implications for Emerging Markets Investing Regina Chi, CFA VP & Portfolio Manager Global Equity Team AGF Investments Inc.
Deglobalization, Technology
and Implications for
Emerging Markets Investing
Regina Chi, CFAVP & Portfolio Manager
Global Equity TeamAGF Investments Inc.
Please see appendix for the full disclaimer.
For advisor use only.
Deglobalization, Technology and Implications
2
Our view:
• Emerging markets have been major beneficiaries of globalization. We believe a plateauing and
even potential reversal of trade openness will create winners and losers within EM, but not
necessarily the usual suspects.
• Technology is more likely to drive some deglobalization and result in a change in trade patterns
and who participates in the global value chain. Risks here are underappreciated.
• Technology will also form new growth opportunities for companies to relocate production, not only
because of cost but numerous other benefits, which will help boost returns over time.
Technology & AI:
Deglobalization Risks
Deglobalization:
Tipping PointsGlobalization:
150 Years In The Making
Please see appendix for the full disclaimer.
For advisor use only.
Deglobalization, Technology and ImplicationsTwo main drivers: Policy (tax & trade) and technology
3
Technology & AI:
Deglobalization Risks
Deglobalization:
Tipping PointsGlobalization:
150 Years In The Making
Please see appendix for the full disclaimer.
For advisor use only.
0
2
4
6
8
10
12
14
1980 1985 1990 1995 2000 2005 2010 2015
%, Sim
ple
Av
era
ge
Tariffs in Advanced
Economies
Tariffs in EM and Developing
Economies (rhs)
0
5
10
15
20
25
30
35
0
5
10
15
20
Ja
n-8
1
Ja
n-8
3
Ja
n-8
5
Ja
n-8
7
Ja
n-8
9
Ja
n-9
1
Ja
n-9
3
Ja
n-9
5
Ja
n-9
7
Ja
n-9
9
Ja
n-0
1
Ja
n-0
3
Ja
n-0
5
Ja
n-0
7
Ja
n-0
9
Ja
n-1
1
Ja
n-1
3
Ja
n-1
5
U.S
. G
ov
t. 1
0 y
ea
r
yie
ld
Source: Bloomberg as of December 31, 2016, 4Q16.
Deglobalization, Technology and ImplicationsDriving Forces: Lower Taxes, Tariffs, Tech and Credit
4
Source: ILO based on AMECO database and ILO database. March 31, 2016.
Source: KPMG, Barclays Research as of March 2017. Source: IMF, Barclays Research as of March 2017.
Technology & AI:
Deglobalization Risks
Deglobalization:
Tipping PointsGlobalization:
150 Years In The Making
20%
25%
30%
35%
40%
45%
50%
19
83
19
85
19
87
19
89
19
91
19
93
19
95
19
97
19
99
20
01
20
03
20
05
20
07
20
09
20
11
20
13
20
15
20
17
Co
rpo
rate
Ta
x R
ate
DM Average
Corporate Tax Rate
EM Average
Corporate Tax Rate
-800
-400
0
400
800
Ma
r-05
Se
p-0
5
Ma
r-06
Se
p-0
6
Ma
r-07
Se
p-0
7
Ma
r-08
Se
p-0
8
Ma
r-09
Se
p-0
9
Ma
r-10
Se
p-1
0
Ma
r-11
Se
p-1
1
Ma
r-12
Se
p-1
2
Ma
r-13
Se
p-1
3
Ma
r-14
Se
p-1
4
Ma
r-15
Se
p-1
5
Ma
r-16
US$
Billio
n
YoY Increase in Gross Private
Domestic Investment
YoY Increase in Non-Financial
Corporate Sector Debt
Please see appendix for the full disclaimer.
For advisor use only.
-30
-20
-10
0
10
20
30
40
1875 1885 1895 1905 1915 1925 1935 1945 1955 1965 1975 1985 1995 2005
%
Global CPI-ex Germany Inflation Global CPI Inflation
Deglobalization, Technology and ImplicationsResulting in Low and Less Volatile Inflation…
5
Source: Macrohistory Database, Barclays Research as of March 2017.
Technology & AI:
Deglobalization Risks
Deglobalization:
Tipping PointsGlobalization:
150 Years In The Making
The Gold Standard
Deglobalization
1970s Stagflation
Hyperglobalization
Please see appendix for the full disclaimer.
For advisor use only.
0
0.02
0.04
0.06
0.08
0.1
0.12
1875 1885 1895 1905 1915 1925 1935 1945 1955 1965 1975 1985 1995 2005
Accelerated globalization brought the Great Moderation:
A period of historically low volatility in global growth
5-Year Rolling Standard Deviation of Global Real GDP Growth
Deglobalization, Technology and Implications…and Low Volatility in Growth
6
Source: Macrohistory Database, Barclays Research as of March 2017.
Technology & AI:
Deglobalization Risks
Deglobalization:
Tipping PointsGlobalization:
150 Years In The Making
First Globalization (1870-1914)
Deglobalization (1914-1945)
Second Globalization
(1946-1990) Great Moderation
During Hyperglobalization
(1990-2007)
Please see appendix for the full disclaimer.
For advisor use only.
*Representative of US, S&P 500 and Russel 2000 companies. Source: Bloomberg, AGF Est as of June 2017.
Deglobalization, Technology and ImplicationsGlobalization Winners: EM Economies & Multinationals
7
Source: World Economics, Barclays Research as of March 2017.
Technology & AI:
Deglobalization Risks
Deglobalization:
Tipping PointsGlobalization:
150 Years In The Making
20
25
30
35
40
45
50
55
60
1950 1960 1970 1980 1990 2000 2010
Emerging Market Economies
Gained Share in Global GDP
EM GDP Share (% of World GDP) G7 GDP Share (% of World GDP)
0%
2%
4%
6%
8%
10%
12%
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
Net Margin, Multinational vs. Domestic Companies*
Multinational Companies Domestic Companies
Please see appendix for the full disclaimer.
For advisor use only.
Real incomes over 20 years, cumulative change
Deglobalization, Technology and ImplicationsGlobalization – Benefited EM Middle Class and Upper, with DM Middle Class Incomes Stagnating
8
Source: Lakner and Milanovic. Data available at: http://go.worldbank.org/nwbukI3.JP0. BCA Research, December 9, 2016.
Technology & AI:
Deglobalization Risks
Deglobalization:
Tipping Points
Globalization:
150 Years In The Making
0
10
20
30
40
50
60
70
80
0 10 20 30 40 50 60 70 80 90 100
Cu
mu
lativ
e G
row
th R
ate
(%
) o
f
Re
al P
PP I
nc
om
e
Percentile of Global Income Distribution
EM Middle Class
DM
Middle
Class
DM
Upper
Class
Global Growth Incidence Curve,
1988-2008
Please see appendix for the full disclaimer.
For advisor use only.
Labour share in DM economies fell (1970-2014)DM Growth without employment
Deglobalization, Technology and ImplicationsTechnology & Offshoring = DM Growth Without Employment
9
Source Left Chart: Financial Times, March 2017. Source Right Chart: ILO based on AMECO database and ILO database, March 2017.
Technology & AI:
Deglobalization Risks
Deglobalization:
Tipping Points
Globalization:
150 Years In The Making
50
100
150
200
250
300
1980 1990 2000 2010
Real Output
Employment
-15
-10
-5
0
(Pe
rce
nt)
Please see appendix for the full disclaimer.
For advisor use only.
We believe there are risks as the main winners from hyper-globalization could see a counter
movement:
• Demographic tailwind, access to cheap labour and high exports could become a headwind
• EM economies most exposed to the global value chain are at risk of being disrupted
• Multinationals who were able to leverage Global Value Chain and wage & tax differences between regions
see their advantage diminish
Deglobalization, Technology and Implications
10
Technology & AI:
Deglobalization Risks
Deglobalization:
Tipping Points
Globalization:
150 Years In The Making
Please see appendix for the full disclaimer.
For advisor use only.
Deglobalization, Technology and ImplicationsAutomation & Robotics, Still Early Stages with Plenty of Room for Growth
11
Source: BCA, Intl federation of Robotics. Jan 2018 *Log =100, Avg price in US & Europe
Source: BCA, Intl federation of Robotics, OECD. Jan 2018 **Number of manufacturing robots per
100k employees
Technology & AI:
Deglobalization Risks
Deglobalization:
Tipping Points
Globalization:
150 Years In The Making
0
100
200
300
400
500
600
700
Density of Manufacturing Robots**
0
10
20
30
40
50
60
70
80
90
100
1990 1994 1998 2002 2006 2010
Ro
bo
t P
ric
e (
$)
Robot Price, Quality Adjusted*
Please see appendix for the full disclaimer.
For advisor use only.
Factory, 500k capacity
EmployeesDevelopment time
Restocking
Adidas Speedfactory
160 2-3 months (est) <1 week
China Avg. 1,200+ 12-18 months 2-3 months
Deglobalization, Technology and ImplicationsTechnology & AI: Lowering Cost & Disrupting the Value Chain
12
Source: Siemens, Adidas, AGF est. as at March 2017.
Technology & AI:
Deglobalization Risks
Deglobalization:
Tipping Points
Globalization:
150 Years In The Making
Please see appendix for the full disclaimer.
For advisor use only.
Deglobalization, Technology and ImplicationsAutomation & AI: Disproportionate Impact on EM, DM Losses May be Offset by Repatriation
13
*Adjusted for wage rates and slower pace of tech adaptation. Data are gross numbers and do not include new job adds from automation. Source: World Bank as at March 2017.
Technology & AI:
Deglobalization Risks
Deglobalization:
Tipping Points
Globalization:
150 Years In The Making
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
China Thailand S. Africa India US Germany UK
% of jobs at risk of automation*
Negative Scenario Base Case
Please see appendix for the full disclaimer.
For advisor use only.
Deglobalization, Technology and ImplicationsMost at Risk: Global Value Chain could be Disrupted
14
*Foreign value added used in country’s exports (upstream) plus value added supplied to other exports (downstream) divided by total exports. Source: Unctad, Barclays, AGF as of March 2017.
Technology & AI:
Deglobalization Risks
Deglobalization:
Tipping Points
Globalization:
150 Years In The Making
0
10
20
30
40
50
60
70
80
90
100
Singapore Malaysia Korea S. Africa China Thailand Japan Taiwan Canada U.S. Mexico Peru Brazil India Colombia
Participation in global value chain*
EM Asia appears most exposed
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For advisor use only.
Deglobalization, Technology and ImplicationsMost Exposed to the U.S. Deglobalizing, Directly & Indirectly
15
Source: OECD, Barclays Research as of March 2017.
Technology & AI:
Deglobalization Risks
Deglobalization:
Tipping Points
Globalization:
150 Years In The Making
Bilateral Trade with U.S. in Final and Intermediate Goods Bilateral Trade with China in Final and Intermediate Goods
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For advisor use only.
Labour Productivity Gains EM vs. DM*
Deglobalization, Technology and ImplicationsIn its Favour, EM Leads in Productivity Gains and There’s Still Plenty of Upside
16
*Data is real PPP adjusted GDP per person employed, data is smoothed. Source: Conference Board Total Economy Database, Econ Weekly as at March 2015.
Technology & AI:
Deglobalization Risks
Deglobalization:
Tipping Points
Globalization:
150 Years In The Making
0
1
2
3
4
5
6
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
%
EM World DM
Please see appendix for the full disclaimer.
For advisor use only.
0
1
2
3
4
5
6
7
8
9
10
1995-2004 2005-2014
%
China India Developing Asia* Advanced Asia** Australia United States
Deglobalization, Technology and ImplicationsEM Rate of Domestic Consumption Growth Expanding vs. DM
17
Data is real household consumption annual growth. *Indonesia, Malaysia, Philippines, Thailand. **HK, Singapore, Korea, Taiwan. Source: IMF, Thompson Reuters as at March 2016.
Technology & AI:
Deglobalization Risks
Deglobalization:
Tipping Points
Globalization:
150 Years In The Making
Please see appendix for the full disclaimer.
For advisor use only.
Deglobalization, Technology and ImplicationsCertain EM Countries are Quickly Catching up in Technology & Innovation
18
R&D Spend to GDP Patents Granted*
Source Left Chart: OECD, UBS as of Sept 2017. Source Right Chart: IP5 Offices, UBS as of Sept 2017. *Includes only IP5 Office patents granted data.
Technology & AI:
Deglobalization Risks
Deglobalization:
Tipping Points
Globalization:
150 Years In The Making
0
50,000
100,000
150,000
200,000
250,000
300,000
350,000
400,000
2011 2012 2013 2014 2015 2016
CAGR During 2011-2016
EU: +8%; JP: -1%; KR: +4%; CN: +22%; US: +7%
European Applicant Korean Applicant USA Applicant
Japanese Applicant Chinese Applicant
Indonesia
Philippines
India
Thailand
Hong Kong
Malaysia
U.K.
China
Singapore
AustraliaU.S.
GermanyTaiwan
Japan
Korea
0%
5%
10%
15%
20%
25%
0.00 1.00 2.00 3.00 4.00 5.00
5-y
ea
r C
AG
R
R&D to GDP Ratio (%)
Bubble Size: R&D Volume US$B PPP
Please see appendix for the full disclaimer.
For advisor use only.
Deglobalization, Technology and ImplicationsDriven by Innovation, IT is Now a Bigger Weighting in EM at the Expense of Energy and Materials.
19
Source: MSCI, Thomson Reuters Datastream, HSBC, August 2018.
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
IT Energy + Materials
Technology & AI:
Deglobalization Risks
Deglobalization:
Tipping Points
Globalization:
150 Years In The Making
IT, 10%
Financials, 22%
Materials, 16%
Energy, 19%
Industrials, 8%
Cons Disc, 5%
Cons Staples, 5%
Telecom, 11%
IT, 27%
Financials, 23%
Cons Disc, 9%
Materials, 8%
Energy, 7%
Cons Staples, 7%
Industrials, 5%
Telecom, 4%
2008 Current
MSCI Emerging Markets Index – Sector Weighting
Please see appendix for the full disclaimer.
For advisor use only.
Conclusion
Reversal of globalization may not mean return to previous norms of winners and losers, and tech may
upend historical precedent.
Potential Winners / Less Impacted:
• Countries with strong domestic consumption and highly-educated labour force
• Companies with strong IP / Patents (Tech, Pharma & Industrial)
• Services or strong brands with limited substitutes (Health Care)
• Basic materials and agriculture
At Risk:
• Global Value Chain countries and companies, especially low-tech manufacturing
• Multinationals, especially those dependent on Global Value Chain, tax, and labour arbitrage
• Companies with weak brands dependent on scale
• Shipping and global distribution companies
20
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For advisor use only.
Company Attributes We Look For:
21
Avoid companies with disruption risk either to new tech or Global Value
Chain disintermediation
Balance sheet strength, ability to
quickly invest in new technologies
Upside to asset turnover and ROIC,
ability to consistently earn an
EVA of CFROI > WACC
High R&D spend, continue to invest in IP and patents
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For advisor use only.
Disclaimers
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