Macro issues always play a key role in investment decisions, but it’s fair to say that globalisation was always considered a fixture within most investing frameworks, rather than an assumption that was up for debate. Open markets, freely flowing capital, and the free movement of people were the established norms of the global economic system. Consumers and businesses benefited in the form of lower production costs, lower prices, larger markets, and greater choice.
In the COVID-19 world, these assumptions are being challenged. While we’re unlikely to see a total rejection of globalisation and a complete closing of national economies, what we have already seen is a reassessment of supply chains and some early efforts at diversifying production and logistics. Where the conversation goes from here is something we will all have to watch, but the long-term implications for prices, business models, and investment portfolios could be significant.
At Lonsec’s latest investment committee meeting, we discussed the ongoing rhetoric around supply chain risks and the desire for governments and companies to become less reliant on China. The dwindling manufacturing base in countries like Australia and the United States have been topics of strategic discussion for a long time. As we know, when the manufacturing goes, it’s very hard to bring it back without something extraordinary happening. Whether COVID-19 is extraordinary enough to make politicians and businesses take real action remains to be seen.
We don’t believe globalisation is coming to an end. However, we do believe the COVID-19 crisis has sparked a serious conversation about the risks of becoming overly dependent on a particular country, manufacturer or market. Some companies are already looking at how they can diversify their supply chains, whether that means bringing those onshore or looking at regions outside China. Depending on how far this process goes, we could be facing some significant structural change in coming years.
One issue this raises is inflation. One thing globalisation has delivered is lower costs of production and lower prices for consumers, which has been the driving force behind its spread. If we start walking back globalisation, there will be benefits in the form of lower supply chain risk, but there will also be the reality of higher costs. We don’t consider this to be an immediate risk, but if this pushback against globalisation were to continue over a number of years, inflation may pick up across the board.
Of course, inflation isn’t something a lot of people are talking about right now. The immediate risk in this environment is the collapse in GDP due to lockdown measures and travel restrictions. Even as the global economy bounces back, we don’t expect inflation to be a problem for investors in the short term. However, over the long term, these structural changes could have a big impact, and this is an area we’re keenly watching. The outcome of the US presidential election will be critical to shaping the conversation, and understanding how these issues will play out and their impact on different asset classes is key.
Even while we grapple with the short-term challenge of the COVID-19 crisis, it is critical that investment committees continue to analyse the long-term macro implications that could follow. These trends feed into our long-term market assumptions, help us determine our strategic asset ranges, and ultimately impact our long-term performance. Even if you consider these issues to be academic now, they likely won’t be down the track, and your portfolio will need to play catchup.
This is where having the right expertise on your investment committee is key. Lonsec’s committees comprise a wide range of experts, from sector specialists to portfolio construction professionals to macro-economists. Without a top-down perspective to inform your investment decisions, you may find the short-term opportunities but miss the big trends that have a real impact on your portfolio’s performance in the long-run.
The power of an investment committee comes from its ability to draw on a wide range of views and expertise. Not everyone has to agree—in fact, disagreement is a sign that you’re doing things right. Different perspectives can create a more robust thesis on which to base your strategic asset views. When it comes to the future of globalisation, no one is going to have all the answers, but chances are that someone else will see something that you’re missing.
Issued by Lonsec Research Pty Ltd ABN 11 151 658 561 AFSL 421 445 (Lonsec). Warning: Past performance is not a reliable indicator of future performance. Any advice is General Advice without considering the objectives, financial situation and needs of any person. Before making a decision read the PDS and consider your financial circumstances or seek personal advice. Disclaimer: Lonsec gives no warranty of accuracy or completeness of information in this document, which is compiled from information from public and third-party sources. Opinions are reasonably held by Lonsec at compilation. Lonsec assumes no obligation to update this document after publication. Except for liability which can’t be excluded, Lonsec, its directors, officers, employees and agents disclaim all liability for any error, inaccuracy, misstatement or omission, or any loss suffered through relying on the document or any information. ©2020 Lonsec. All rights reserved. This report may also contain third party material that is subject to copyright. To the extent that copyright subsists in a third party it remains with the original owner and permission may be required to reuse the material. Any unauthorised reproduction of this information is prohibited.
