deglobalization, technology and implications for emerging ... · deglobalization, technology and...

Deglobalization, Technology

and Implications for

Emerging Markets Investing

Regina Chi, CFAVP & Portfolio Manager

Global Equity TeamAGF Investments Inc.

Please see appendix for the full disclaimer.

For advisor use only.

Deglobalization, Technology and Implications

2

Our view:

• Emerging markets have been major beneficiaries of globalization. We believe a plateauing and

even potential reversal of trade openness will create winners and losers within EM, but not

necessarily the usual suspects.

• Technology is more likely to drive some deglobalization and result in a change in trade patterns

and who participates in the global value chain. Risks here are underappreciated.

• Technology will also form new growth opportunities for companies to relocate production, not only

because of cost but numerous other benefits, which will help boost returns over time.

Technology & AI:

Deglobalization Risks

Deglobalization:

Tipping PointsGlobalization:

150 Years In The Making



Deglobalization, Technology and ImplicationsTwo main drivers: Policy (tax & trade) and technology

3

Technology & AI:


Deglobalization:





0

2

4

6

8

10

12

14

1980 1985 1990 1995 2000 2005 2010 2015

%, Sim

ple

Av

era

ge

Tariffs in Advanced

Economies

Tariffs in EM and Developing

Economies (rhs)

0

5

10

15

20

25

30

35

0

5

10

15

20

Ja

n-8

1

Ja

n-8

3

Ja

n-8

5

Ja

n-8

7

Ja

n-8

9

Ja

n-9

1

Ja

n-9

3

Ja

n-9

5

Ja

n-9

7

Ja

n-9

9

Ja

n-0

1

Ja

n-0

3

Ja

n-0

5

Ja

n-0

7

Ja

n-0

9

Ja

n-1

1

Ja

n-1

3

Ja

n-1

5

U.S

. G

ov

t. 1

0 y

ea

r

yie

ld

Source: Bloomberg as of December 31, 2016, 4Q16.

Deglobalization, Technology and ImplicationsDriving Forces: Lower Taxes, Tariffs, Tech and Credit

4

Source: ILO based on AMECO database and ILO database. March 31, 2016.

Source: KPMG, Barclays Research as of March 2017. Source: IMF, Barclays Research as of March 2017.

Technology & AI:


Deglobalization:



20%

25%

30%

35%

40%

45%

50%

19

83

19

85

19

87

19

89

19

91

19

93

19

95

19

97

19

99

20

01

20

03

20

05

20

07

20

09

20

11

20

13

20

15

20

17

Co

rpo

rate

Ta

x R

ate

DM Average

Corporate Tax Rate

EM Average

Corporate Tax Rate

-800

-400

0

400

800

Ma

r-05

Se

p-0

5

Ma

r-06

Se

p-0

6

Ma

r-07

Se

p-0

7

Ma

r-08

Se

p-0

8

Ma

r-09

Se

p-0

9

Ma

r-10

Se

p-1

0

Ma

r-11

Se

p-1

1

Ma

r-12

Se

p-1

2

Ma

r-13

Se

p-1

3

Ma

r-14

Se

p-1

4

Ma

r-15

Se

p-1

5

Ma

r-16

US$

Billio

n

YoY Increase in Gross Private

Domestic Investment

YoY Increase in Non-Financial

Corporate Sector Debt



-30

-20

-10

0

10

20

30

40

1875 1885 1895 1905 1915 1925 1935 1945 1955 1965 1975 1985 1995 2005

%

Global CPI-ex Germany Inflation Global CPI Inflation

Deglobalization, Technology and ImplicationsResulting in Low and Less Volatile Inflation…

5

Source: Macrohistory Database, Barclays Research as of March 2017.

Technology & AI:


Deglobalization:



The Gold Standard

Deglobalization

1970s Stagflation

Hyperglobalization



0

0.02

0.04

0.06

0.08

0.1

0.12

1875 1885 1895 1905 1915 1925 1935 1945 1955 1965 1975 1985 1995 2005

Accelerated globalization brought the Great Moderation:

A period of historically low volatility in global growth

5-Year Rolling Standard Deviation of Global Real GDP Growth

Deglobalization, Technology and Implications…and Low Volatility in Growth

6

Source: Macrohistory Database, Barclays Research as of March 2017.

Technology & AI:


Deglobalization:



First Globalization (1870-1914)

Deglobalization (1914-1945)

Second Globalization

(1946-1990) Great Moderation

During Hyperglobalization

(1990-2007)



*Representative of US, S&P 500 and Russel 2000 companies. Source: Bloomberg, AGF Est as of June 2017.

Deglobalization, Technology and ImplicationsGlobalization Winners: EM Economies & Multinationals

7

Source: World Economics, Barclays Research as of March 2017.

Technology & AI:


Deglobalization:



20

25

30

35

40

45

50

55

60

1950 1960 1970 1980 1990 2000 2010

Emerging Market Economies

Gained Share in Global GDP

EM GDP Share (% of World GDP) G7 GDP Share (% of World GDP)

0%

2%

4%

6%

8%

10%

12%

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

Net Margin, Multinational vs. Domestic Companies*

Multinational Companies Domestic Companies



Real incomes over 20 years, cumulative change

Deglobalization, Technology and ImplicationsGlobalization – Benefited EM Middle Class and Upper, with DM Middle Class Incomes Stagnating

8

Source: Lakner and Milanovic. Data available at: http://go.worldbank.org/nwbukI3.JP0. BCA Research, December 9, 2016.

Technology & AI:


Deglobalization:

Tipping Points

Globalization:


0

10

20

30

40

50

60

70

80

0 10 20 30 40 50 60 70 80 90 100

Cu

mu

lativ

e G

row

th R

ate

(%

) o

f

Re

al P

PP I

nc

om

e

Percentile of Global Income Distribution

EM Middle Class

DM

Middle

Class

DM

Upper

Class

Global Growth Incidence Curve,

1988-2008



Labour share in DM economies fell (1970-2014)DM Growth without employment

Deglobalization, Technology and ImplicationsTechnology & Offshoring = DM Growth Without Employment

9

Source Left Chart: Financial Times, March 2017. Source Right Chart: ILO based on AMECO database and ILO database, March 2017.

Technology & AI:


Deglobalization:

Tipping Points

Globalization:


50

100

150

200

250

300

1980 1990 2000 2010

Real Output

Employment

-15

-10

-5

0

(Pe

rce

nt)



We believe there are risks as the main winners from hyper-globalization could see a counter

movement:

• Demographic tailwind, access to cheap labour and high exports could become a headwind

• EM economies most exposed to the global value chain are at risk of being disrupted

• Multinationals who were able to leverage Global Value Chain and wage & tax differences between regions

see their advantage diminish

Deglobalization, Technology and Implications

10

Technology & AI:


Deglobalization:

Tipping Points

Globalization:




Deglobalization, Technology and ImplicationsAutomation & Robotics, Still Early Stages with Plenty of Room for Growth

11

Source: BCA, Intl federation of Robotics. Jan 2018 *Log =100, Avg price in US & Europe

Source: BCA, Intl federation of Robotics, OECD. Jan 2018 **Number of manufacturing robots per

100k employees

Technology & AI:


Deglobalization:

Tipping Points

Globalization:


0

100

200

300

400

500

600

700

Density of Manufacturing Robots**

0

10

20

30

40

50

60

70

80

90

100

1990 1994 1998 2002 2006 2010

Ro

bo

t P

ric

e (

$)

Robot Price, Quality Adjusted*



Factory, 500k capacity

EmployeesDevelopment time

Restocking

Adidas Speedfactory

160 2-3 months (est) <1 week

China Avg. 1,200+ 12-18 months 2-3 months

Deglobalization, Technology and ImplicationsTechnology & AI: Lowering Cost & Disrupting the Value Chain

12

Source: Siemens, Adidas, AGF est. as at March 2017.

Technology & AI:


Deglobalization:

Tipping Points

Globalization:




Deglobalization, Technology and ImplicationsAutomation & AI: Disproportionate Impact on EM, DM Losses May be Offset by Repatriation

13

*Adjusted for wage rates and slower pace of tech adaptation. Data are gross numbers and do not include new job adds from automation. Source: World Bank as at March 2017.

Technology & AI:


Deglobalization:

Tipping Points

Globalization:


0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

China Thailand S. Africa India US Germany UK

% of jobs at risk of automation*

Negative Scenario Base Case



Deglobalization, Technology and ImplicationsMost at Risk: Global Value Chain could be Disrupted

14

*Foreign value added used in country’s exports (upstream) plus value added supplied to other exports (downstream) divided by total exports. Source: Unctad, Barclays, AGF as of March 2017.

Technology & AI:


Deglobalization:

Tipping Points

Globalization:


0

10

20

30

40

50

60

70

80

90

100

Singapore Malaysia Korea S. Africa China Thailand Japan Taiwan Canada U.S. Mexico Peru Brazil India Colombia

Participation in global value chain*

EM Asia appears most exposed



Deglobalization, Technology and ImplicationsMost Exposed to the U.S. Deglobalizing, Directly & Indirectly

15

Source: OECD, Barclays Research as of March 2017.

Technology & AI:


Deglobalization:

Tipping Points

Globalization:


Bilateral Trade with U.S. in Final and Intermediate Goods Bilateral Trade with China in Final and Intermediate Goods



Labour Productivity Gains EM vs. DM*

Deglobalization, Technology and ImplicationsIn its Favour, EM Leads in Productivity Gains and There’s Still Plenty of Upside

16

*Data is real PPP adjusted GDP per person employed, data is smoothed. Source: Conference Board Total Economy Database, Econ Weekly as at March 2015.

Technology & AI:


Deglobalization:

Tipping Points

Globalization:


0

1

2

3

4

5

6

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

%

EM World DM



0

1

2

3

4

5

6

7

8

9

10

1995-2004 2005-2014

%

China India Developing Asia* Advanced Asia** Australia United States

Deglobalization, Technology and ImplicationsEM Rate of Domestic Consumption Growth Expanding vs. DM

17

Data is real household consumption annual growth. *Indonesia, Malaysia, Philippines, Thailand. **HK, Singapore, Korea, Taiwan. Source: IMF, Thompson Reuters as at March 2016.

Technology & AI:


Deglobalization:

Tipping Points

Globalization:




Deglobalization, Technology and ImplicationsCertain EM Countries are Quickly Catching up in Technology & Innovation

18

R&D Spend to GDP Patents Granted*

Source Left Chart: OECD, UBS as of Sept 2017. Source Right Chart: IP5 Offices, UBS as of Sept 2017. *Includes only IP5 Office patents granted data.

Technology & AI:


Deglobalization:

Tipping Points

Globalization:


0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

2011 2012 2013 2014 2015 2016

CAGR During 2011-2016

EU: +8%; JP: -1%; KR: +4%; CN: +22%; US: +7%

European Applicant Korean Applicant USA Applicant

Japanese Applicant Chinese Applicant

Indonesia

Philippines

India

Thailand

Hong Kong

Malaysia

U.K.

China

Singapore

AustraliaU.S.

GermanyTaiwan

Japan

Korea

0%

5%

10%

15%

20%

25%

0.00 1.00 2.00 3.00 4.00 5.00

5-y

ea

r C

AG

R

R&D to GDP Ratio (%)

Bubble Size: R&D Volume US$B PPP



Deglobalization, Technology and ImplicationsDriven by Innovation, IT is Now a Bigger Weighting in EM at the Expense of Energy and Materials.

19

Source: MSCI, Thomson Reuters Datastream, HSBC, August 2018.

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

IT Energy + Materials

Technology & AI:


Deglobalization:

Tipping Points

Globalization:


IT, 10%

Financials, 22%

Materials, 16%

Energy, 19%

Industrials, 8%

Cons Disc, 5%

Cons Staples, 5%

Telecom, 11%

IT, 27%

Financials, 23%

Cons Disc, 9%

Materials, 8%

Energy, 7%

Cons Staples, 7%

Industrials, 5%

Telecom, 4%

2008 Current

MSCI Emerging Markets Index – Sector Weighting



Conclusion

Reversal of globalization may not mean return to previous norms of winners and losers, and tech may

upend historical precedent.

Potential Winners / Less Impacted:

• Countries with strong domestic consumption and highly-educated labour force

• Companies with strong IP / Patents (Tech, Pharma & Industrial)

• Services or strong brands with limited substitutes (Health Care)

• Basic materials and agriculture

At Risk:

• Global Value Chain countries and companies, especially low-tech manufacturing

• Multinationals, especially those dependent on Global Value Chain, tax, and labour arbitrage

• Companies with weak brands dependent on scale

• Shipping and global distribution companies

20



Company Attributes We Look For:

21

Avoid companies with disruption risk either to new tech or Global Value

Chain disintermediation

Balance sheet strength, ability to

quickly invest in new technologies

Upside to asset turnover and ROIC,

ability to consistently earn an

EVA of CFROI > WACC

High R&D spend, continue to invest in IP and patents



Disclaimers

22

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Disclaimers

23

AGF Investments is a group of wholly owned subsidiaries of AGF Management Limited, a Canadian reporting issuer. The subsidiaries included in AGF Investments are AGF Investments Inc. (AGFI), AGF Investments America Inc. (AGFA),

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This document may not be reproduced (in whole or part), transmitted or otherwise made available to any other party without the prior written consent of AGF Investments Inc.

Publication Date: September 17, 2018.



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