Michael Avery: Recently, investor circles have started to believe that we're entering a new epoch which will see a reversal of the many facets of globalisation. This new thinking is supported by the views of the CEO of BlackRock, Larry Fink, and a director at Oxford Economics, Charles Burton. I'm joined now by Anton Eser, Chief Investment Officer of 10X Investments.
Anton, welcome, as always a great pleasure having you on the show. Larry Fink, the CEO of BlackRock, has said that the Ukraine conflict has put us at the end of globalisation, which we have experienced over the last three decades. Can you just give us some insights into the benefits of globalisation and how it's impacted the global economy over that time?
Anton Eser: Thanks Michael. Globalisation has had a huge impact on the economy in the last four decades. If you look at, for example, global exports as a percentage of GDP, back in the Sixties, it was down below 10%. Up until 10 years ago, it was up at 25%, so 25% of GDP coming from global exports. We can see that in the numbers. We saw it first in the Seventies with what happened with global oil demand. And then with China entering the WTO in 2001.
It's just had a massive impact on everything really. If you look at the positive impact it's had on the emerging world and China in particular, where we've seen over 300 million people come out of poverty, reducing global poverty levels from 65 to 10%.
In particular, it has had a massive impact on global inflation. It's difficult to really get an exact number, but we can see it everywhere in the cost of things, for example personal computers and TV sets, etc. Some estimates have it that up to 0.6% per year has been taken off inflation over the last 25 years. So, globalisation really has been a big factor in our lives for the last three or four decades.
Michael Avery: And China's role in that ... in fact, it was almost as if China's policy was to become the world's manufacturing centre, subsidise its industry heavily and so, with that cost competitiveness, be a net exporter not only of goods, but also of deflation around the world. Now, we hear a lot of talk about deglobalisation recently. Charles Burton, from Oxford Economics, suggests that the global financial system has become more insular due to financial deglobalisation that started during the Global Financial Crisis and has accelerated during the Covid pandemic. Do you think it's happening, and what are the significant events contributing to deglobalisation and this narrative emerging around that?
Anton Eser: It has been talked about a lot in the last year, in particular after the Russia-Ukraine invasion. It's also coming through in the stats. I mentioned that global exports number as a percentage of GDP, that actually topped out almost 10 years ago. It actually stopped increasing. This kind of structural levelling off and, more recently, decline you see it in all the numbers.
Pre-Covid, we saw what happened in the US with the election of Trump and populism around protecting jobs and protecting manufacturing. Brexit, in a sense, was a kind of expression of that. So it's been with us, in terms of a narrative, for the last five years.
Covid most certainly accelerated that. We saw what happened with the disruption of global supply chains and the impact that had on inflation. This approach to just-in-time inventory and reliance on global supply chains, that whole model, which had been accelerating really since the Nineties, has really started to be questioned over the last couple of years.
And then on top of that, what we saw last year in terms of geopolitics and cyber security. There is this real bifurcation that we're seeing in global trade and this idea which has been growing around what’s been called friend-shoring. Ultimately, if you're going to rely on global production and imports, then make sure you are doing it through a country, a regime which is friendly to your views. So, you see a lot of trade moving away from China to start with.
Those numbers are definitely coming through. If you look at how much China accounted for US imports up until 2018, almost 36% of US import cargo tonnage came from China alone, whereas the rest of Asia was down at 25%. Last year, that number was on a par at 30%. So, it's absolutely happening in the data that we've seen this kind of pivot away from reliance on China.
Michael Avery: And we see it increasingly in the geopolitical tensions and the sabre-rattling and shooting down of spy balloons. Talk of UFOs to one side, it is one of those things that in US politics seems to unite the House, which has been extremely partisan. It's one of those bipartisan issues.
Speaking of bipartisan issues, the Biden administration in the US recently passed a suite of bills to boost green energy investment, chip production and manufacturing. And some are really concerned that what lies at the heart of this is a rise of a kind of new tariff protection, neo-mercantilist type world view. It's very zero-sum thinking. How meaningful are these bills in the context of the current trend of deglobalisation?
Anton Eser: Look, politics is always very tricky to work through, but it feels like these bills, as you say, have bipartisan support. The one theme which unites all voters across America is this "Let's make America great again" or, "Made in America" is Biden's slogan. So it appeals across the whole of the voting population. That's really important, firstly, and I think the number is something like up to $2 trillion across these three bills that you mentioned.
And there's real evidence that it's happening. There were announcements across the car industry in the US last year around $70 billion worth of investment domestically. We saw $39 billion announced in terms of clean energy. So there are bills being passed and there is meaningful investment starting in 2022 and into 2023.
It's a game changer in many ways because it ultimately not only creates tension between the U.S. and China, which was already there, it also creates some tension between the U.S. and Europe. And, in the end, all other countries will respond. That's effectively what happened in the 1930s. If you think about the Smoot-Hawley Tariff Act, in 1930, which applied duties on all imports, and the rest of the world responded. That's why it's not a zero-sum game; it's actually a negative sum game because effectively it creates inefficiencies, poor productivity, loss of trust, all these things come through.
And Trump really was the beginning of this. But to see this now coming through from a Democrat side of things in the US shows that this is right across both sides of the political sphere.
Michael Avery: Obviously the impact then on inflation, because clearly all of these forces are inflationary. If you're going to raise tariffs, if you're going to artificially increase costs, that kind of thing, that pushes back against the decades of deflationary forces that we've been seeing. So what does a full-blown reversal of this trend mean for investors and their future returns, and how one allocates capital to construct portfolios at a time like this?
Anton Eser: Well, I think you've hit the key point. There have been so many factors pushing deflation – demographics, technology, globalisation, debt, etc, that we've lived through for the last 25 years. We've had this spike and now some view that spike as being very much a function of kind of post-Covid and what happened in terms of a temporary disruption to supply chains and energy markets and, therefore, it should be transitory. But this kind of switch from it being a huge tailwind, which it was the 0.6% that I mentioned earlier, to something which is now a headwind, that's a big switch around in terms of the impact on global GDP.
I've always been in the deflation camp for almost all of my career due to the themes I mentioned earlier. And, for the first time, I'm really looking at this and going, well, actually, how big a game changer is this? Does this mean that inflation remains higher and that, coupled with higher interest rates, is this a regime change? And that means all of a sudden this view on bonds, which has been such a strong view for so many years, around bond yields going lower is not going to happen.
We have to see how much further this progresses, but it does ultimately mean that we could be in a new regime of higher inflation and one has to ask what the impact will be on the discounting mechanism for equities. I don't have an answer to that, Michael. It's probably one of the most important long-term structural themes which every investor has to pay attention to. I don't think we can draw conclusions just yet, but it really is, a potential game-changer in terms of what happens in the global economy over the next decade.
Michael Avery: As you say, the stage is set for a particular outcome there, and it will be interesting to see if the feast ensues in terms of what this portends. Anton Eser, thank you very much, as always for your insightful thoughts on Not The Daily News on Classic Business.
This transcript has been edited for clarity. Listen to the full interview: How will deglobalisation impact investors?
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