BofA: 40% Of Margin Expansion In The Last 20 Years Is From Globalization

Roughly around the time David Rosenberg "calculated" the contribution of the Fed's unprecedented monetary policy on the S&P (which he estimated at roughly 1,000 points, which is about half of what Albert Edwards believes the Fed "added" to the stock market), Bank of America was out with an analysis, this time looking at the contribution "globalization" has had on global corporate margins. The reason: an attempt to handicap the potential risks from all-out trade war which leads to the unwind of "globalization", by which we assume the bank refers to global supply chains, JIT procurement, lower wages for US-based workers, grassroots anger with the status quo, and so on.

As BofA's Savita Subramanian writes, the key risk to equities following Trump's election "was a shift from globalization to protectionism, which could choke off growth for a very global index - one-third of sales are from overseas, and indirect exposure via commodities, FX, etc. is inestimable."

As for the key reason why corporations, banks and shareholders everywhere are terrified by the prospect of "globalization" going in reverse is because as noted above, BofA calculates, it has boosted 40% of the rise in S&P500 margins over the last two decades, largely due to lower taxes from offshoring and, of course, lower compensation, i.e. wages - the biggest catalyst behind the ongoing nationalist/populist tide against the status quo.


So why is BofA worried? Well, should trade war indeed send globalization in reverse, the most globally-oriented sectors - Tech, Energy, Industrials, Materials - could see both margins and multiples hurt in such a shift according to Subramanian.

Another risk: the pickup in capex has been led by big multinationals, which could be stymied by uncertainly around tariffs. So far, there are no signs of this - capex guidance remains above avg., and S&P companies have cited capex as their key use of tax reform proceeds.

Putting it together, what is the risk to overall EPS? Recall that last week Barclays estimated that the threat to S&P earnings was roughly an 11% drop if 10% tariffs are enacted across the board.

What about BofA? Using input cost data from the BEA, the bank estimates that a 10% increase in import costs would equate to a 3-4% hit to S&P 500 EPS (assuming foreign sales fall by ≤2%), and a ~50bp hit to operating margins.

It is worth noting that while tech is the biggest contributor to S&P earnings, not all industries might be impacted by trade wars. For example, China consumes $120bn+ of semis, these are used to produce $700bn+ in finished electronics, and given the absence of local substitutes, it is hard to argue that tariffs would have a sizable longer term impact on US chip imports. For other industries, the impact is more evident with BofA especially concerned about tariffs in an industry, like retail, with limited pricing power where production shifts could take years.

So, according to BofA, what is the worst possible outcome? Here is Subramanian's take:

Worst outcome = stagflation: global growth would suffer despite local inflation. An IMF simulation found that if the US, China and Europe each raised import prices by 10%, GDP would drop by 2-3% in all three regions, not including second-order impacts (confidence, etc.). Tariffs + higher oil prices = "bad" inflation that could offset the consumption boost from higher wages/tax reform.

Or, to summarize, "we see stagflation as the biggest risk to equities."

Which is ironic, because even without a "trade war" the US is already headed there, thanks to surging input costs and rising inflationary pressures, while GDP growth is set to slump going forward according to Goldman.

In other words, we are already there.


Occams_Razor_Trader JRobby Thu, 06/21/2018 - 18:27 Permalink

I left B of A- when during the housing boom- they had a big sign offering "Home Loans- No Social Security Number" needed!

My thought was if someone defaults how do you track them?

Apparently- No One would default- or no one (illegals) would need to be tracked.

Now I bank with another Goliathan national bank, where are the anti trust laws for banks??!




In reply to by JRobby

lester1 Thu, 06/21/2018 - 15:18 Permalink

Globalization has been disastrous for United States. We have lost millions of good paying jobs and our standard of living has been in decline.

The goal of globalization is to make the .01% insanely wealthy, and everybody else debt slaves. It's actually part of The Reptilian agenda to enslave the planet from within. This agenda is talked about in the Bible.

rmogabe William Dorritt Thu, 06/21/2018 - 16:04 Permalink

Then add in the stolen/reverse-engineered IP loss then the US losses are off the charts. Also, why go through the effort of studying to be an engineer in the USA when local corporations despise you because they can offshore your job at (what they think) is a fraction of the cost. I play "spot the white guy" at US tech universities these days. Corporations will happily send your hard earned IP to China manufacturers to gain a few short term bucks. 

Short term gain, long term agony!

Also, the low intelligence brass in the military hate engineers and scientist "geeks" just as much. But their meatbags with guns are becoming less and less of an asset as high-tech takes over the battlefield.

When the US military has to outsource tech development to India and China because of the lack of local skill, well then... gosh.


In reply to by William Dorritt

Zorba's idea lester1 Thu, 06/21/2018 - 16:09 Permalink

Yep. Globalization has rewarded the Elite Asset class Trillions of Dollars while the NonAsset class have been handed their asses. America can be summed up as simply the ".01 Percenters" asset stripping America of virtually everything including our Constitution. Indeed, it is now ...of the Corporations, by the Corporation, for the Corporations. The only Citizenship that counts is our beloved NWO "Corporate Citizens".             


In reply to by lester1

css1971 lester1 Thu, 06/21/2018 - 16:30 Permalink

The 1% understand economics. That supply and demand applies just as much to labour as anything else. And they know that the largest cost to business is labour.

So. Of course the goal was to increase profit...

What's beautiful about it though is they managed to 'incept' the idea into every leftist's brain. Lefties now regularly get out into the street and protest with the effect of increasing corporate profits. Genius.

In reply to by lester1

Quantify Thu, 06/21/2018 - 15:21 Permalink

Globalization is selling out your country for fiat currency growth. Fair trade is what worked for centuries and didn't include massive immigration which is destroying the fabric of U.S. society. Europe is already done, stick a fork in her.

William Dorritt Thu, 06/21/2018 - 15:26 Permalink

Income redistribution from the prols to the investors works, to keep the trend going we need to reduce median income slowly while experiencing double digit productivity gains.

Once the prols are replaced with machines, and exterminated, the 20% who have benefited from the current system will need to have 10 cars in every driveway to keep demand stable.

. . . _ _ _ . . . Thu, 06/21/2018 - 15:29 Permalink

Every time I read bad news about a country, I notice their exchanges rise in value.
Turkey, Italy, Spain, Portugal, Greece, Brazil, ZA...
Am I the only person in the world who thinks that this is troublesome?
Race to the bottom, but what happens when we get there? (They never were very good with exit strategies.)

BandGap Thu, 06/21/2018 - 15:31 Permalink

"In other words, we are already there."

Nothing to lose then.  If the pain is coming via globalization, why not take another route. 

So, it was propaganda when the history books stated that protectionism was wrong. Fancy that. This means we have everything backwards, so to speak. Time to get things balanced again. Maybe slay a few reptiles.

Mariner33 Thu, 06/21/2018 - 15:37 Permalink

Under Warren Buffet, crony capitalism that makes the Brazilian boys blush, he pocketed billions from taxpayers, directly and indirectly.   He is no genius but an amoral psychopath.

knotjammin2 Thu, 06/21/2018 - 15:55 Permalink

I don't care how many bullshit graphs you have this is a bullshit article.  All this country (USA) has been doing since 9-11 is backing up.  Sooner or later this hand will be called and god help the bankers and other globalist when it happens.  If the people knew the truth you wouldn't have enough lamp post to hang the SOB's!

vladiki Thu, 06/21/2018 - 22:27 Permalink

ZH has a visceral (i.e. brainless) hangup about socialism.  But we're in denial.  Since FDR we've developed our own deformed version to the point that there's now govt interference in everything 'to improve outcomes', and massive welfare spending at every level from Wall St down ..... but we supposedly hate it so won't pay for it, hence our appalling expanding deficits.   Time now to either stop all the interference and freebies, or embrace reality and pay for them.  IF we don't make that decision our bondholders will.  They need - so far - to buy Treasuries, but they're sick of us and organising alternatives.

And we need to abandon the big lie that what's good for Capital is good for Labor. Truth is that their interests are usually opposed.  Trump's onto that.  Globalisation is reversing.  It was and still is used to force the working man into impossible competition with coolie wages overseas. The social consequences of "duty to Shareholders to maximise profit' have been terrible - far greater than the benefits of rise in average (though all to the top 10%) GDP/person.  Margin expansion will indeed reverse, and shareholders must get ready for a prolonged belting.  That penny has not dropped yet.