By Michael Zezas, Head of Public Policy Research at Morgan Stanley
What’s the cost of remodeling a global economy? What’s the benefit? Ready or not, we’re about to find out. Why? Because geopolitical events are accelerating important secular trends:
The “slowbalization” of economic and national interests eating away at globalization; and
The shift from a single economic power base and set of rules to a “multipolar world.”
While the sell-off in risk markets is getting attention now, our conversations with corporate decision-makers and policy-makers are increasingly taken up with how to deal with these two important and overlapping transitions. These decisions have long-term consequences, so investors need to understand how their choices may play out.
Our latest Blue Paper is a guide to navigating these secular trends, with frameworks we developed in 2019 ("The Slowbalization Playbook") and 2020 ("Investing for a Multipolar World", both reports are available to zerohedge professional subscribers). For the sake of your Sunday, here’s what you need to know, in brief:
Geopolitics are accelerating slowbalization and the multipolar world, providing more incentives to near-shore or “friend-shore” supply chains: To be clear, these trends didn’t start with Russia invading Ukraine or even US/China trade tensions. Services trade was already outpacing goods trade, and automation has been reducing the primacy of low-cost labor. But the incentives for companies and policy-makers to rethink globalization have been amplified by recent geopolitical developments. A bipartisan consensus emerged in the US around an existential need to outcompete China. The result in 2018 was tariff and non-tariff barriers (i.e., export restrictions), the latter meant to protect the US advantage in key technologies. We expect these barriers to endure and boost costs beyond the directly taxed sectors, like semis, to industries like auto batteries and AI that are adopting these new technologies. The pandemic served painful notice for some sectors that paying up for ”just in case” instead of “just in time” inventories might be the only way to avoid the supply chain bottlenecks caused by lockdowns, mask mandates, or other restrictions. And Russia’s invasion of Ukraine and the subsequent sanctions cut off exports of energy and agricultural products to Europe and other parts of the globe. Relying on allies rather than rivals yields supply chain security.
With transitions come costs and lingering inflation… Consider that Europe now is eager to build infrastructure to import natural gas from the US to avoid reliance on Russia. Or consider a hypothetical American multinational moving some of its production out of China to avoid new US export controls. This shift comes not only with a cost but also fresh uncertainties around labor and infrastructure in the new locale. Our equity research colleagues believe that profit margins could face headwinds in sectors like European chemicals, European and Asian midstream and downstream natural gas utilities, auto OEMs, consumer staples, portions of leisure, and transportation.
...but transitions also drive opportunity. All this "geopolitical capex" has to drive capital somewhere. Some geographies and sectors are likely beneficiaries: For US and European companies, friend-shoring is more attractive in countries with larger labor pools, competitive wage costs, and trade agreements with key end markets. In varying ways and to varying degrees, Mexico, India, and Turkey are recipient candidates. And regardless of the location, building these new supply chains will almost surely drive a pick-up in demand – and profits – in sectors like semiconductor capital equipment, automation, clean tech, defense/cybersecurity, industrial gases, cap goods, and metals/mining.
Of course, this transition is a multi-year project. And as in any remodel, we expect many hidden costs and benefits to emerge along the way. We’ll keep updating our playbook, and you, as we move through the process.