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Global markets still have a bumpy road ahead when it comes to recovering from the impact of Covid-19 – with the addition of nearshoring and friendshoring trends to consider.
Deglobalisation has become a frequently discussed topic for investment teams at insurers, and eyes are turned toward China. The world’s second largest economy produces over 30% of the world’s goods, and has historically been a hotspot for manufacturing, especially by western countries that have outsourced there – due to low labour costs, the impact of ‘free market’ economics of the seventies, and a resulting lack of regulatory compliance.
However, given the country’s recent announcement of its lowest GDP growth target in decades, rising inflation, and heightened geopolitical tension – especially with the US and Taiwan – investors are wondering how, when, and if it will secure full economic recovery.
There are also the supply chain issues that have belaboured global markets since the end of the first wave of Covid-19 lockdowns, which has meant many US organisations have returned their factories to the US or Mexico to avoid lengthy port delays.
The progression of deglobalisation and nearshoring trends post-Covid continues to be a hot topic with the potential for financial pain – and gain.
A 2023 manufacturing industry outlook from Deloitte found that many US manufacturers were boosting their local capacities in the wake of ongoing supply chain disruptions. “[Manufacturers are] integrating their businesses across the value chain to reduce exposure to logistics issues and transportation bottlenecks,” the report said.
This meant that many companies had increased their reliance on production facilities in the US, which created new capacities for locally-sourced parts and materials, the report continued. “The incentives in the Infrastructure Investment and Jobs Act (IIJA), the CHIPS Act, and the Inflation Reduction Act (IRA) are expected to bolster this trend to increase US manufacturing capacity,” it added.
“In general terms, we can speak of the beginning of the end of globalisation,
which [brings] with it a generalised deflation due to cost reduction.”
Along with regulatory shifts, changes in global and national consumption cycles are also important to consider. These patterns needed to be more closely monitored, said Manuel Rodríguez López de Coca, Equities Manager at MAPFRE AM, the Spanish insurer’s asset management arm. Some companies will be adversely affected, he added. “We must be especially careful with those that are highly dependent on production in China.”
López de Coca said that a challenging geopolitical context going forward – with fraught China-Taiwan, China-US, and Russia-Ukraine-Europe relations – could exacerbate these trends. “The war is causing structural changes in trade relations,” he said. “In general terms, we can speak of the beginning of the end of globalisation, which [brings] with it a generalised deflation due to cost reduction.”
There is also the ESG angle of nearshoring to consider, which companies could utilise as reasoning for a kind of retrenchment – to essentially return jobs to their local economies, often in developed economies, whilst lessening their carbon footprint.
“Production will no longer be decided solely on the basis of economic criteria,
but will be increasingly influenced by geostrategic factors."
At the Insurance Investor Live | Europe event, Aileen Mathieson, Group Chief Investment Officer at Aspen, said she was seeing a push for enhanced social responsibility from insurers, specifically in the context of Solvency II changes and the Just Transition. Mathieson said she was in favour of rethinking "how government and institutional investors can work together, especially for green and ESG projects," and that this often meant reallocating capital to local infrastructure projects.
Discussing predictions for an increasingly-deglobalised future economy in China, López de Coca said he foresaw trade becoming increasingly regionalised. This could mean inevitable cost rises for investors. “Production will no longer be decided solely on the basis of economic criteria, but will be increasingly influenced by geostrategic factors,” he said.
An EY analysis released this past autumn saw an accelerated shift toward a multipolar world, with two key uncertainties primarily underwriting deglobalisation: 1) geopolitical relations and 2) economic policy stances.
It also identified a “friends first” mentality – arising from strong but fractured international alliances – that could drastically change economic stability and investment decisions for insurers. A friends first mentality would mean that “trade and capital flow relatively freely amongst allies, leading to companies ‘friendshoring’ key operations and supply chains,” the report said. Friendshoring accompanies nearshoring as nascent production trend on the horizon.
However, at Clear Path Analysis's Insurance Investor Live | Europe event in January, James Pomeroy, Global Economist at HSBC, said that whilst deglobalisation was certainly a buzzword, he foresaw a robust bounce in the China market later this year. This bounce, he said, would be driven by consumer spending post-pandemic.
“The surge in shipping costs we saw in 2021 is responsible for a
considerable amount of global inflation."
Pomeroy said he believed the influential supply chain disruptions of the past three years were not necessarily indicative of seismic shifts. “The surge in shipping costs we saw in 2021 is responsible for a considerable amount of global inflation since [companies] had to over order, which was a huge challenge for businesses,” he added, saying he believed these difficulties could be overcome.
For investment teams at insurance organisations, the broader concatenation of macroeconomic factors – deglobalisation, friendshoring, nearshoring, as well as ongoing inflation – could mean changes to fixed income investments, which have historically offered stable inflows amidst, even, turbulent markets.
With inflation reaching all-time highs, Ismael García Puente, Fund Portfolio Manager at MAPFRE AM, predicted that, soon, “China, which for 30 years led economic growth in Asia, will be outpaced by other emerging countries.” This could mean a massive swing for western companies – including insurers' investment portfolios – that have long invested in China.
However, García Puente also said that he remained relatively bullish about Chinese markets, noting that a shift in global investment models could mitigate the uncertainty – with added emphasis on diversification. “It’s time to adapt,” he said, “and to build even more diversified portfolios with the idea that having a broad spread of many different risks is better than having a lot of a few risks.”
Sticking to this traditional logic could be the name of the game for those investing in China moving forward.
This strategy was echoed by Kelly Chung, Investor Director, Head of Multi-Assets at the Hong Kong-based asset manager Value Partners Group. She said she was seeing heightened interest in high yield Asia bonds – specifically in the Chinese high yield space. “The 180-degree change in sentiment [is] driven by the supportive policies in the property sector and the recovery in the consumption and industrial sectors on the back of the country’s reopening,” she said.
“Whilst the rest of the world is facing recession risks,
China is in a different cycle.”
Chung added that she saw duration risk becoming less of a concern due to peaking US Treasury yields, which meant that investors were extending appetites to longer-dated bonds in search of more upside. She said she was particularly optimistic about momentum in Asian fixed income and credit markets – especially as credit spreads in US Investment Grade (IG) bonds have tightened.
“Whilst the rest of the world is facing recession risks, China is in a different cycle,” she continued. “The government has accelerated supportive measures for the property sector, aiming to regain people’s confidence.”
The country's complicated internal economic forces are also at play here.
“China's population is shrinking and the effect a smaller workforce could have on the world’s second-largest economy could be a worrying prospect," said Michael Ashton, Managing Principal at Enduring Investments, in Clear Path Analysis’s recent Institutional Fixed Income report. "This phenomenon could mean a rise in the official retirement age and further shifts in production and consumption cycles."
The ongoing real estate collapse and the recent protests against government heavy-handedness and political style could also play into this developing phenomenon – with the combination of these factors meaning nearshoring trends will continue as more companies seek to end recent volatility with a sure thing onshore.
