Deglobalization: Investing Successfully in a Shrinking World

By George Sweeney

The world is changing. The Federal Funds rate is at the highest level in the past 22 years. The suggested “transitory” inflation is sticking around like gum on the bottom of your shoe. Global supply chains are shifting and, in most cases, shrinking as everything moves closer to home.

All these macroeconomic changes are making the world smaller, and that’s not necessarily bad for investors — if you know where to look. Although deglobalization will take a transition that presents many challenges, there’s also plenty of potential money on the table for motivated investors.

Schroders has labeled the reshuffling of the global economy as the “3D Reset” — decarbonization, demographics and deglobalization. Post-Covid-19, geopolitical tensions have been popping up worldwide. As a result, deglobalization means businesses are looking to fortify and protect supply chains, even at higher costs. Along with “reshoring,” we’ll also see plenty of “nearshoring” and “friendshoring,” which will lead to a wave of opportunities for investors. 

Why deglobalization will create investing opportunities

It’s no longer a race to the bottom for manufacturing and supply chains. We’re exiting an era of maximum efficiency that’s led to a deflationary environment with falling prices. This may sound like doom and gloom, but outsourcing supply chains to the lowest bidder created a house of cards that was hard to control.

Prices are rising, but this is opening the door for more stable economic relations based on more than just low prices. Moving supply chains and imports away from China means all that money and investment needs to find new homes. And this is where the investing opportunities present themselves.

Decoupling from China as relations remain frayed means the U.S. will likely strike up more lucrative partnerships with countries like Mexico (3.2% GDP growth in 2023) and other regions in Latin America. What’s even better is that as China’s economy has matured and transitions from a producer to a consumer, it will also look to pump money into these regions, along with places like India (6.3% GDP growth) and Southeast Asia.

How investors can benefit from deglobalization

All this change will act as inflationary pressure, but this also creates plenty of potential growth for investors to tap into. Although we’ll likely see much more onshoring, where business and manufacturing return to the U.S., creating wide profit margins will be difficult. Business costs will undoubtedly increase, and pockets of efficiency will be rare.

The investments holding more potential for growth will probably come from nearshoring and friendshoring. As a slightly fragmented version of globalization, you won’t see the same low prices anytime soon, but there could be alternative upsides. For example, more trade with friendly neighbors and nations will mean fewer tariffs on imports, which should lower prices, increase demand and benefit both the U.S. and its partners.

Finding investments as the world changes

For investors, your challenge will be picking the regions or companies that are going to come out on top as the aftershock of deglobalization ripples around the world. To invest broadly, consider exchange-traded funds (ETFs) as a starting point.

A broad Latin America-focused ETF tracking major firms throughout these regions could be useful. Examples include the iShares Latin America 40 ETF (ILF) and the Franklin FTSE Latin America ETF (FLLA). Or there are even broader passive options like the Columbia EM Core ex-China ETF (XCEM) and the Freedom 100 Emerging Markets ETF (FRDM) — among others.

However, a decent case could be made for active management and investment funds that use local knowledge and expertise to hand-pick the stocks that might see the most acceleration due to deglobalization. Popular active options include the BlackRock Emerging Markets ex-China Fund (MKECX) or the Fidelity Emerging Markets Discovery Fund (FEDDX) — although the latter comes with some exposure to China.

The silver linings of deglobalization

The investing landscape feels pretty rocky right now, but volatility is expected with big changes. A massive transformation will cause short-term pain, and you probably feel that right now with your everyday spending and your investments. However, these seismic shifts could open up more possibilities for expanding your portfolio as the world shrinks.

Bad news has largely overshadowed these silver linings. But if you keep an eye on the long-term outcomes, you might find this a pivotal moment for your investment portfolio.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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