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The ‘PGIM-Megatrends-New-Era-of-Globalization’ study shared by PGIM India MF says that the introduction of the layers of political risk into the business and investment decisions of firms, trade and industrial policy often cloud the environment for investors.
What does this mean for broader investment landscape?
- Natural resource providers who avoid aligning themselves with a great power not only have access to a broader set of markets but also a broader pool of capital and mining technology
- In anticipation of restrictive trade policies and tariffs, Chinese manufacturers have been moving more production to Europe and North America
- The impact of this new phase of globalization will be uneven across sectors and countries
Investment implications
- Advanced computer chips are critical for cutting edge AI models and applications
- Power rivalry is creating a more fragmented market and increases uncertainty
- While the world is shifting towards EVs, many automakers have missed the start leaving EV manufacturers such as Tesla and BYD with a big advantage
- Despite facing steep tariffs in Europe and the US, BYD has growth opportunities in Southeast Asia, Latin America and the Middle East
- There are real estate opportunities on both sides of the US-Mexico border
- The long-term demand for copper, which is critical to several major industries including EVs, semiconductors, renewable energy and construction, is robust, but the metal has supply constraints
- However, two pure-play copper miners – Ivanhoe Mines and Ero Copper, may offer solid growth prospects to investors considering their huge cooper reserves
Portfolio implications
- Investors should focus on countries with privileged access to free-trade zones such as Poland and Mexico or countries with comparative advantages in business environment or labor cost like India or Vietnam
- Investors need to ensure their sovereign risk framework evaluates a country’s vulnerability to price shocks arising from disruptions to food or energy supply chains
- They should also should consider conducting geopolitical stress-tests on their portfolios as the new era of globalization will likely lead to divergent outcomes across both sectors and countries
- Counter rising geopolitical risk and the market volatility it can create; investors should consider additional approaches to protect their portfolios like option-based strategies which may not be alpha generating but can offer an additional way of managing the portfolio
