Trend And The End Of Globalization?

Ruchir Sharma

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2HOW DEGLOBALIZATION WILL CHANGE THE WORLD | RUCHIR SHARMA

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

What Is Globalization?

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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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1870 – 1913: First wave of globalization

1970s – 2008:Second wave of

globalization

Echoes of the Interwar Era: Global Trade

Global Trade to GDP(%)

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

4% 4% 5%

18%

30%

10%16%

30%

60%55%

0%

10%

20%

30%

40%

50%

60%

70%

1600 1700 1800 1870 1913 1933 1949 1973 2008 2016 Est.

1914 – 1945: Interwar period

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Now Capital Flows Have Fallen Back to the 1980 Level

Global Cross-Border Banking Flows

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

2%

16%

2%

0%

10%

20%

1980 2007 2014

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6HOW DEGLOBALIZATION WILL CHANGE THE WORLD | RUCHIR SHARMA

The Flow of People Is Slowing

Cumulative Net Migration from EM to DM CountriesMillions of People

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

7

12

13

1616

12

6

8

10

12

14

16

18

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

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Net Migration to the United States Is Down, Too

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

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

0

400

800

1,200

1,600

2,000

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

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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)

Source: MSIM Calculations, IMF, Haver Analytics

52

27

6

0

10

20

30

40

50

60

2003 – 2007 2008 – 2015 2016

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The Revolt Against Incumbent Politicians Rolls On…

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

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

90%

40%

25%

50%

75%

100%

2009 2016

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“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”

Leading to Economic Experiments in the Developed World

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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“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”

… And the Emerging World

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

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“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”

…. And to Nationalist Attempts to Divert Popular Attention

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

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

66,000 70,000

1,600,000

0

500,000

1,000,000

1,500,000

2,000,000

Apple Inc. Employees in the U.S. Apple Orchard Picking Jobs in the U.S. Apple Inc. Supplier Jobs, Most Outsidethe U.S.

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The Edge Shifts to Less Export-Dependent Countries

Exports to GDP (%)

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

68%64%

53%

42%38% 36% 33% 31% 28% 26% 26%

21% 20% 20% 18% 17%13% 12% 11% 10%

0%

20%

40%

60%

80%

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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 %)

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

0

4

8

12

0

25

50

75

1970 – 1975 2014Trade to GDP Inflation (rhs)

2020Est

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…And That Check Is Weakening

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

Source: Factset as of December 2016

1.2

1.3

1.4

1.5

1.6

1.7

1.8

1.9

2.0

2.1

Jan-15 Aug-15 Mar-16 Oct-16

U.S. Election

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Signs That Wage Pressures Are Rising

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

Source: Atlanta Federal Reserve as of December 2016

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1

1.0

2.0

3.0

4.0

5.0

6.0

Jan-98 Sep-00 May-03 Jan-06 Sep-08 May-11 Jan-14 Sep-16

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Power Is Shifting Back to Workers

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

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

0%

3%

6%

9%

12%

48%

51%

54%

57%

60%

1970 1986 2012 2015 2020 Est.

Labor Share (Left) Profit Share (Right)

58%

53%

3%

10%

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Peak Bond Bubble

Decadal Winners 1950 – 2000 2010’s winners

2010

100

150

200

250

300

350

400

450

500

550

2006 2008 2009 2010 2011 2012 2013 2014 2015 2016

Total Return Index* Levered to Equity-Equivalent VolatilityTotal Return Intex* Unlevered

2010’s Winners: G-3 Government Bonds

Index

* 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(%)

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

0.9%

2.1%1.8%

3.6%

0.7%0.3%

2.5% 2.5%

0.0%

1.0%

2.0%

3.0%

4.0%

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

Global GDP Global Inflation (proxied w/US)

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The King Kong Dollar Keeps Climbing

U.S. Real Effective Exchange Rate

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

90

100

110

120

130

140

150

1970 1975 1980 1986 1991 1996 2002 2007 2012

50% Increase from 1978 – 1985

30% Increase from 1995 – 2001

28% increase from 2011 – 2016

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The Cheap “Fay Wray” Currencies-DM

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

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

U.K.

Japan

Euro

(1.31)

(2.50)

(2.00)

(1.50)

(1.00)

(0.50)

0.00

0.50

1.00

1.50

2.00

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

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The Cheap “Fay Wray” Currencies-EM

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

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

(1.93)(2.50)

(2.00)

(1.50)

(1.00)

(0.50)

0.00

0.50

1.00

1.50

2.00

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

Mexico

Egypt

Malaysia

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Rising Geopolitical Tensions

Geopolitical Tensions Increase Under Multipolarity

Source: Lotta Harbom, Erik Melander and Peter Wallensteen, Dyadic Dimension of Armed Conflict, 1946 – 2007.Journal of Peace Research 45(5):697-710(2008).1. [ ]

0

4

8

12

16

20

0

4

8

12

16

20

Number of Interstate and Internationalized Internal Conflicts (1)

HegemonicInstability(USSR collapse)

Multipolarity

@ BCA Research 201650 60 70 80 90 2000 10

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Rising Defense Spending

Global Defense SpendingUS$Bn

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

0

500

1,000

1,500

2,000

2,500

2015 2030EU.S. Germany Japan China India Russia

RussiaIndia China

JapanGermanyU.S.

JapanGermanyU.S.

RussiaIndia China

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• 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

Summary

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• 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

Implications for Markets and Strategic Portfolios

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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

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

Low

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

High

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During Rapid Advances in Globalization, Inequality Rose

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

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

0%

5%

10%

15%

20%

25%

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

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31HOW DEGLOBALIZATION WILL CHANGE THE WORLD | RUCHIR SHARMA

0%

10%

20%

30%

40%

0%

10%

20%

30%

40%

1917 1927 1937 1947 1957 1967 1977 1987 1997 2007

Bottom 90% Top 0.1%

This Time Was No Different

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

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

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“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?”

In One Region, Revolt is Bringing Reformers to Power: Latin America

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(%)

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

13%

25%

29%

34%36%

0%

10%

20%

30%

40%

Alternative for Germany(Germany)

National Front-1st Round(France)

5 Star Movement-1stRound (Italy)

Freedom Party of Austria(Austria)

Party of Freedom(Netherlands)

Average

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Trump Has Promised a Tax Revolution

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

35%

15%

0%

10%

20%

30%

40%

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(%)

Average

Source: MSIM EM Research

3935

30 30 30

24

1915

0

10

20

30

40

50

U.S.(Current)

India (CurrentEffective Tax Rate

Germany Mexico Japan Korea Eastern Europe U.S.(Projected)

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The End of the Party for Multinationals

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

Source: BCA. Data as of December 2016

42

48

44

40

43

46

49

2004 2009 2015

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In The Past, Export Powers Grew Faster

GDP per Capita and Export Growth1980 – 2015Exports per Capita Growth Rate (1980 – 2015)

Source: BCA, WDI, Haver Analytics.

China

Korea Thailand

India

Spain

Chile Germany

Brazil

Italy

USA

Mexico

France Japan

South Africa 0%

4%

8%

12%

16%

0% 2% 4% 6% 8% 10% 12%GDP per Capita Growth Rate (1980 – 2015)

SingaporeTaiwan

Hong Kong

Export Economies