Trend-And-The-End-Of-Globalization

Trend And The End Of Globalization?

Ruchir Sharma of this line of this line

What Is Globalization?

A period in which new technologies and new policies lead to …

• Large increase in global Trade flows

• Large increase in global Capital flows

• Large increase in global Migration flows

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Globalization Advances and Retreats in Long Waves

1870 – 1913 • First Wave of Globalization

1914 – 1945 • First Wave of De-globalization

1970 – 2008 • Second Wave of Globalization

2008 – ??? • Second Wave of De-globalization?

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Echoes of the Interwar Era: Global Trade

Global Trade to GDP (%) 1870 – 1913: 1914 – 1945: 1970s – 2008: First wave of Interwar period Second wave of globalization globalization 70% 60% 60% 55%

50%

40% 30% 30% 30% 18% 20% 16% 10% 10% 4% 4% 5% 0% 1600 1700 1800 1870 1913 1933 1949 1973 2008 2016 Est.

Source: Klasing and Milionis (2014), Estavadeordal, Frantz and Taylor (2003), Penn World tables, MSIM calculations

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Now Capital Flows Have Fallen Back to the 1980 Level

Global Cross-Border Banking Flows

20%

16%

10%

2% 2%

0% 1980 2007 2014

Source: “Financial ‘deglobalization’?: capital flows, banks, and the Beatles.” Kristin Forbes, Bank of England. IIF. As of November 2014.

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The Flow of People Is Slowing

Cumulative Net Migration from EM to DM Countries Millions of People

18 16 16 16

14 13

12 12 12

8 7

6 1986 – 1990 1991 – 1995 1996 – 2000 2001 – 2005 2006 – 2010 2011 – 2015

Source: UN Population Database, Haver Analytics. Data as of 2Q – 2016

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Net Migration to the United States Is Down, Too

U.S.: New Permanent Residents 1820 – 2014 Number of Immigrants (Thousands)

2,000

1,600

1,200

800

400

0 1820 1830 1840 1850 1860 1870 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010

Source: Department of Homeland Security, “Yearbook of Immigration Statistics,” MSIM calculations

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Deglobalization Is One Factor Making Rapid Growth Even Rare

Average Number of Countries Growing at 7 Percent Growth Rate Number of Countries (Out of 188 Countries) 60 52 50

30 27

10 6

0 2003 – 2007 2008 – 2015 2016

Source: MSIM Calculations, IMF, Haver Analytics

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The Revolt Against Incumbent Politicians Rolls On…

Incumbents Have Been Losing More and More Elections Since the Global Financial Crisis Share of Elections With Incumbent Victories (50 Most Populated Democracies)

100% 90%

75%

50% 40%

25% 2009 2016

Source: MSIM Emerging Markets Calculations. Data taken from various news sources and political research. 50 most populated democracies

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Leading to Economic Experiments in the Developed World

“How Trump-o-nomics Will Bring Back the ’80s” “Trump’s trade policies become more shocking by the day” “Wake up Wall St: There’s more to Trump’s tax policy than cuts”

“Foreign Secretary: U.K. ‘first in line’ for free trade deal with U.S.” “Theresa May: U.K. cannot keep ‘bits’ of EU membership” “More Britons want greater control of immigration than EU free trade-poll”

Source: Wikimedia Commons, Trump quotes taken from various publications from November 2016 to January 2017 and Theresa May quotes taken from July 2016 to January 2017, Quotes taken from Google News

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… And the Emerging World

“India Changes GDP Calculation Method” “Narendra Modi Bans India’s Largest Currency Bills”

“Hungary mandates pro-government ads for banks in loan program” “Hungary is cutting its corporate tax rate below every country except notorious havens”

“Poland backs lower retirement age” “Poland dismantles private funds in pension revamp”

Source: Wikimedia Commons. Quotes taken from Google News and were spoken between June 2015 to January 2017

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…. And to Nationalist Attempts to Divert Popular Attention

“Russia’s in the Tank, But Putin Rides High” “Economy slumps but Putin Soars” “In Russia, It’s Not the Economy, Stupid”

“As Erdogan cracks down on free press, journalists leave dire warning as they flee” “In University Purge, Turkey’s Erdogan Hits Secularists and Boosts Conservatives”

Source: Wikimedia Commons. Quotes taken from 2015 – 2017 and taken from Google News

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Outsourcing as a Model Is Under Threat

More People Pick Apples Than Work for Apple Inc. in the U.S. Number of Jobs

2,000,000

1,600,000 1,500,000

1,000,000

500,000

66,000 70,000 0 Apple Inc. Employees in the U.S. Apple Orchard Picking Jobs in the U.S. Apple Inc. Supplier Jobs, Most Outside the U.S.

Source: MSIM Research, Apple, NPR, Engadget. Data as of 4Q-2016

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The Edge Shifts to Less Export-Dependent Countries

Exports to GDP (%)

80% 68% 64%

60% 53%

42% 38% 40% 36% 33% 31% 28% 26% 26% 21% 20% 20% 18% 17% 20% 13% 12% 11% 10%

Source: IMF MSIM EM Research as of September 2016, Green are countries we like in EM

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Globalization Held Inflation in Check

Before 2008, Rising Trade Competition Helped Contain Inflation Trade to GDP (%) and Inflation (Y-o-Y %)

75 12

50 8

25 4

0 0 1970 – 1975 2014 2020Est Trade to GDP Inflation (rhs)

Source: MSCI Calculations, IMF, WB, Haver Analytics. Data as of 2014 *Estimates are subject to change and may not actually come to fruition

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…And That Check Is Weakening

The Rise of Anti-Global Populists Like Trump Has Raised Inflation Expectations U.S. 10-Year Breakeven Inflation Rate (%)

2.1 2.0 1.9 1.8 1.7 1.6 1.5

1.4 U.S. Election 1.3 1.2 Jan-15 Aug-15 Mar-16 Oct-16

Source: Factset as of December 2016

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Signs That Wage Pressures Are Rising

More Money for Middle America? U.S. Atlanta Fed Wage Tracker (y/y%, 3mma)

6.0 1 0.9 5.0 0.8 0.7 4.0 0.6 0.5 3.0 0.4 0.3 2.0 0.2 0.1 1.0 0 Jan-98 Sep-00 May-03 Jan-06 Sep-08 May-11 Jan-14 Sep-16

Source: Atlanta Federal Reserve as of December 2016

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Power Is Shifting Back to Workers

U.S: Labor Share and Profit Share as % of GDP (%)

60% 12% 10% 58%

57% 9%

54% 6%

53% 51% 3% 3%

48% 0% 1970 1986 2012 2015 2020 Est.

Labor Share (Left) Profit Share (Right)

Source: Goldman Sachs, BEA. Data as of December 2016

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Peak Bond Bubble

Decadal Winners 1950 – 2000 2010’s winners 2010’s Winners: G-3 Government Bonds Index

550

500

450

400

350

300

250

200 2010 150

100 2006 2008 2009 2010 2011 2012 2013 2014 2015 2016 Total Return Index* Levered to Equity-Equivalent Volatility Total Return Intex* Unlevered

* Equally weighted U.S., Japan,Germany 30yr Government Bond Total return.

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Deglobalization Could Lead to Low Growth, Higher Inflation

The Deglobalization Period After 1914 Saw Weaker Growth With Higher Inflation (%)

4.0% 3.6%

3.0% 2.5% 2.5% 2.1% 2.0% 1.8%

0.9% 1.0% 0.7% 0.3%

0.0% 1820 – 1870 1871 – 1913 1914 – 1950 *1990 – 2008

Global GDP Global Inflation (proxied w/US)

Source: MSIM Research, Maddison database, Global Financial Data. * Note: 1990 used to capture globalization effect as start date due to high inflation outliers in 1970s – 80s

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The King Kong Dollar Keeps Climbing

U.S. Real Effective Exchange Rate

150 50% Increase from 140 1978 – 1985

130 30% Increase from 28% increase from 1995 – 2001 2011 – 2016 120

110

100

90 1970 1975 1980 1986 1991 1996 2002 2007 2012

Source: MSIM Emerging Markets calculations, Bloomberg, JP Morgan Database. Data as of Dec 2016

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The Cheap “Fay Wray” Currencies-DM

Competitiveness Index Based on REER and Purchasing Power Parity (PPP)

2.50 2.00 1.50 U.K. 1.00 0.50 0.00 Japan (0.50) (1.00)

(1.50) (1.31) (2.00) Euro (2.50) 1980 1981 1982 1983 1985 1986 1987 1988 1990 1991 1992 1993 1995 1996 1997 1998 2000 2001 2002 2003 2005 2006 2007 2008 2010 2011 2012 2013 2015 2016

Source: MSIM EM Research, Haver Analytics, BIS, IMF, JPM, Wikimedia Commons, Google Images as of December 2016

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The Cheap “Fay Wray” Currencies-EM

Currency Competitiveness Index Based on REER and Purchasing Power Parity (PPP)

2.50 2.00 1.50 Mexico 1.00 0.50 0.00 Egypt (0.50) (1.00) (1.50) (2.00) (1.93) Malaysia (2.50) 1980 1981 1982 1983 1985 1986 1987 1988 1990 1991 1992 1993 1995 1996 1997 1998 2000 2001 2002 2003 2005 2006 2007 2008 2010 2011 2012 2013 2015 2016

Source: MSIM EM Research, Haver Analytics, BIS, IMF, JPM, Wikimedia Commons, Google Images as of December 2016

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Rising Geopolitical Tensions

Geopolitical Tensions Increase Under Multipolarity

Number of Interstate and Internationalized Internal Conflicts (1) Multipolarity 20 20

16 16 Hegemonic 12 Instability 12 (USSR collapse)

8 8

4 4

0 0 50 60 70 80 90 2000 10 Source: Lotta Harbom, Erik Melander and Peter Wallensteen, Dyadic Dimension of Armed Conflict, 1946 – 2007. @ BCA Research 2016 Journal of Peace Research 45(5):697-710(2008). 1. [ ]

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Rising Defense Spending

Global Defense Spending US$Bn 2,500

2,000 Russia India 1,500 China

Russia 1,000 India China Japan 500 Japan Germany Germany U.S. U.S. 0 2015 2030E U.S. Germany Japan China India Russia

Source: BCA, World Economic Forum. 2030 Estimates based on latest Stockholm International Peace Research Institute, 2016 data

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Summary

• When globalization retreats, the retreat in flows of goods, money and people tends to last

• Deglobalization, depopulation and deleveraging will lead to continued low global growth

• Slow growth is fuelling anti-establishment revolt – sometimes for the better

• As anti-global populists rise, the checks on inflation are falling

• Tax policy is the new protectionist policy

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Implications for Markets and Strategic Portfolios

• Strong domestic economies, and companies, have the edge: outsourcing and MNCs may be out

• Secular low in inflation and interest rates behind us

• Rising inflation and interest rates do not favour bonds; inflation hedges favoured

• The King Kong Dollar keeps marching – look for weak “Fay Wray” currencies

• Increasing geopolitical tension to benefit defence sector globally

• Country dispersion to matter even more in an era of deglobalization

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APPENDIX

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Capital Flows Peaked in 1914, Did Not Recover Till 1990s

Global Capital Mobility – a Measure of the Scale and Ease of Capital Flows – since 1860

High

Low

1860 1870 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000

Source: “Globalization in Historical Perspective,” Bordo, Taylor, Williamson (2003)

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During Rapid Advances in Globalization, Inequality Rose

Income Inequality in the United States Percentage Income Received by Top 1% of Households in U.S.

25%

20%

15%

10%

0% 1775 1785 1795 1805 1815 1825 1835 1845 1855 1865 1875 1885 1895 1905 1915 1925 1935 1945 1955 1965 1975 1985 1995 2005 2015

Source: Lindert and Williamson (2016), Piketty and Saez (2006)

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This Time Was No Different

Share of U.S. Household Wealth by Income Level U.S. Top 0.1% Hold the Same Amount of Wealth as Bottom 90%

40% 40%

30% 30%

20% 20%

10% 10%

0% 0% 1917 1927 1937 1947 1957 1967 1977 1987 1997 2007

Bottom 90% Top 0.1%

Source: DB, Data estimated by Berkely professors Seaz and Zucman using capitalised income tax returns..QJE May 2016

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In One Region, Revolt is Bringing Reformers to Power: Latin America “Argentina pays off ‘holdout’ bondholders, elevating hopes for economy” “Argentina rakes in cash from new tax law”

“Brazil’s Acting President Michel Temer Vows to Tackle Insolvent Pension System” “Michel Temer to pursue tax reform in 2017”

“Peru’s Congress approves Kuczynski’s economic reform package” “Will Kuczynski unlock Peru’s economic potential?”

Source: Wikimedia Commons Quotes Taken from April 2016 to January 2017 and taken from Google News.

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The Center Holds: European Populists Still a Minority

Latest Polls for Euro Area Populist Parties, in the First Round of the Next Elections (%) 40% 36% 34%

29% 30% Average 25%

20% 13%

10%

0% Alternative for Germany National Front-1st Round 5 Star Movement-1st Freedom Party of Austria Party of Freedom (Germany) (France) Round (Italy) (Austria) (Netherlands)

Source: Ipsos Poll released 12/3/2016, Peil Poll released 12/18/2016, INSA Poll released 12/20/2016, Demopolis released 12/20/2016, and Gallup / Osterreich released 12/12/2016

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Trump Has Promised a Tax Revolution

Current U.S. Corporate Income Tax and Trump Proposal (%) 40% 35%

30%

20% 15%

10%

0% Current Trump Proposal

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…Which Could Trigger a Race to the Bottom for Corporate Taxes

Combined Corporate Income Tax (2016), Select Countries (%) 50

39 40 35 30 30 30 Average 30 24 19 20 15

0 U.S. India (Current Germany Mexico Japan Korea Eastern Europe U.S. (Current) Effective Tax Rate (Projected)

Source: MSIM EM Research

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The End of the Party for Multinationals

Revenues from Abroad Are in Decline, as a Share of Total Revenue US S&P 500 Revenues from Abroad / Total (%)

49 48

43 42

40 2004 2009 2015

Source: BCA. Data as of December 2016

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In The Past, Export Powers Grew Faster

GDP per Capita and Export Growth Export Economies 1980 – 2015 Exports per Capita Growth Rate (1980 – 2015) 16% China

12% Thailand India Korea 8% Mexico Hong Kong Spain Brazil Taiwan Germany Singapore Chile 4% France Italy Japan South Africa USA 0% 0% 2% 4% 6% 8% 10% 12% GDP per Capita Growth Rate (1980 – 2015)

Source: BCA, WDI, Haver Analytics.

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