Globalization:
HAVE THE TIDES TURNED?
Kurt Umbarger, CFA Global Equity Portfolio Specialist, International Equity Division March 2017
For accredited investors only. Not for further distribution.
2
1600s 1700s 1900s 1800s
Evolution of Globalization
1600
East India
Company
1840─1870
Second Industrial
Revolution
Pre-WWI
The great 100 years of globalization
Technology (steam ships, railroads,
telegraph)
Economic theory (Adam Smith,
declining tariffs)
Gold standard (exch. rate stability)
1670
Hudson’s Bay
Trading Company
1760─1820
First Industrial
Revolution
1930
Smoot-Hawley
Tariff Act
1828
U.S.
Tariffs
Source: T. Rowe Price.
3
Image: By National Photo Company [Public domain], via Wikimedia Commons from Wikimedia Commons.
The Trumps of Their Day
4
Source: T. Rowe Price.
Smoot-Hawley Tariffs—Save the Worker!
Second-highest U.S. tariffs in 100 years
Productivity gains from electrification had resulted in a
significant increase in farmland capacity
Import tariffs introduced to protect American jobs, namely
farmers
World retaliated with higher tariffs, Canada imposed higher
tariffs on what amounted to 30% of U.S. exports and formed
a new trading alliance with Britain
Great Depression worsened and world trade collapsed
5 5
We Told You So!
0
1
2
3
4
5
6
1929 1930 1931 1932 1933
U.S
. $
Bil
lio
n
World Trade (in USD)
Source: League of Nations “World Economic Survey 1932-33” as of 31 December 2016.
WORLD TRADE 1929–1933, U.S. $BN
6
1940s 1970s 2000s 1990s
Evolution of Globalization
1944
Bretton Woods,
IMF, World Bank
1994
North American Free
Trade Agreement
(NAFTA)
2017
Regional
Comprehensive
Economic
Partnership?
Mercantilism
gives way to
Multilateralism
2017
Trans-Pacific
Trade Partnership?
1948
General Agreement
on Trade and Tariffs
(GATT)
1971
Bretton Woods
collapses
1995
World Trade
Organization (WTO)
Golden Era of
Globalization
Source: T. Rowe Price.
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Source: World Bank as of 31 December 2016. © BCA Research 2017.
100 Years Later, Tariffs Have Declined
Dramatically
Russian Federation
Brazil (8.3%)
South Africa
World
China
Philippines
Australia
U.S.
UK
EU
Japan
New Zealand
Malaysia
Canada
0 1 2 3 4 5%
AVERAGE TARIFF RATE
20
10
CHINESE AVERAGE TARIFF RATE
30%
8
Source: World Bank as of 31 December 2016.
World Trade—Gross Domestic Product
0
10
20
30
40
50
60
70
Tra
de
as
% G
DP
WORLD
World
9 9
We Have Spent the Postwar Era Building a
More Connected World
Sources: The Conference Board Total Economy Database, UN Population Division, and McKinsey Global Institute analysis.
LINES SHOW TOTAL TRADE FLOWS BETWEEN REGIONS, BUBBLES SHOW
PARTICIPATION IN WORLD TRADE
USD $50–$100 billion USD $100–$500 billion USD $500 billion or more
1990
100% = $1.8 trillion USD
41% 12%
4%
2%
3%
8%
22%
2%
2013
100% = $17.2 trillion USD
32% 8%
6%
5% 2%
32%
7%
4%
5%
4%
10 10
Globalization, It’s Not Just Trade
It’s not just goods…
And it’s not just services…
It’s capital
And it’s people
11 11
We Tested Some Limits of the Globalization
of Capital
Sources: Oxford Economics and FactSet. As of 30 June 2016.
0
100,000
200,000
300,000
400,000
500,000
600,000
700,000
800,000
Va
lue
of
Iss
ua
nc
es
in
U
.S. $
Mil
lio
n
U.S. Asset-Backed Securities Issuance
12 12
Do We Have Enough Workers?
Source: Oxford Economics and FactSet. Working age is defined as 15 to 64 years old. As of 30 June 2016.
70
80
90
100
110
120
WORKING-AGE POPULATION, INDEXED TO 100
Euro Zone Japan BRIC ASEAN United States
13 13
Probably Not Without Immigration!
Source: U.S. Census Bureau, Population Division. As of December 2014.
0
200
400
600
800
1,000
1,200
1,400
2007-10 2010-15 2015-20 2020-25 2025-30 2030-35
Ch
an
ge
, T
ho
us
an
ds
, A
nn
ua
l A
ve
rag
e
FOREIGN-BORN TO DRIVE U.S. WORKING-AGE
POPULATION (16-64 YEARS OLD)
Foreign Born
Native Born
14
Source: Organization for Economic Co-operation and Development (OECD) 2010, “Perspectives on Global Development 2010: Shifting Wealth,” © OECD Publishing as of 31 December 2016.
Globalization Appears to Be Succeeding at the
Global Level…
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
Affluent Converging Struggling Poor
% C
ou
ntr
ies in
Each
C
las
sif
ica
tio
n
SHIFT IN GLOBAL WEALTH
1990s2000s
15
Sources: YouGov/The Economist, World Bank, and UN.
…But Sentiment Varies Nationally
ENOUGH TO GO AROUND?
Attitudes toward globalization change in GDP per person
16 16
All images sourced from Wiki Commons. See Additional Disclosures page for attributions.
Italy
Beppe Grillo
May 2018
United Kingdom
Theresa May
July 2016
Germany
Martin Schulz
September 2017
United States
Donald Trump
November 2016 Netherlands
Geert Wilders
March 2017
Philippines
Rodrigo Duterte
May 2016
Mexico
Andrés Manuel
López Obrador
July 2018
Populism on the Rise
France
Marine Le Pen
April 2017
Italy
Beppe Grillo
May 2018
United Kingdom
Theresa May
July 2016
Germany
Martin Schulz
September 2017
United States
Donald Trump
November 2016 Netherlands
Geert Wilders
March 2017
Philippines
Rodrigo Duterte
May 2016
Mexico
Andrés Manuel
López Obrador
July 2018
France
Marine Le Pen
April 2017
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The Winds of U.S. Policy Have Shifted
Stalled Recovery (2012 to 2016)
Initial Post-GFC Rebound (2008 to 2011)
“Trumponomics” (2017 to ??)
Tailwinds Headwinds
Monetary
Policy
Fiscal
Policy
Regulation
Tax
Policy
Trade
Policy ??
18 18
Trump Sees a Trade Deficit as “Losing;”
Importers at Risk
Trade accounted for 30% of U.S. GDP in 2015 versus 18% in the 1980s
Average for other advanced economies was 70% in 2015
Manufactured goods account for 75% of U.S. imports, and oil imports
make up virtually all the rest
Most prominent imports are autos, data processing machinery, retail
goods, and pharmaceuticals
24% of manufacturing imports come from China, 20% from the EU, and
24% from Canada and Mexico combined
Border adjustability tax or no?
Source: World Bank; analysis by T. Rowe Price as of 31 December 2016.
19 19
Image: By Ralf Roletschek - Transferred from the German Wikipedia. Original file is here. (Original upload log available below.), GFDL,
https://commons.wikimedia.org/w/index.php?curid=35770, via Wikimedia Commons from Wikimedia Commons
We Can Put People Back to Work, but…
20 20
All images sourced from Wiki Commons. See Additional Disclosures page for attributions.
…There Are Bigger Forces at Work That Will
Drive Productivity and Globalization
INVESTMENT IMPLICATIONS
22 22
Global Region Market Summary
Source: T. Rowe Price.
Positives Negatives
United
States
Tax reform, deregulation, fiscal stimulus
Solid economy
Unemployment <5%
Protectionism
Elevated valuations
Rising interest rates and U.S. dollar
Europe ECB stimulus, weaker euro
Early-cycle economic expansion
Upside earnings potential
EU breakup risks
Brexit impact
Muted fiscal support
Japan Weaker yen
BOJ stimulus
Improving corporate governance
Sensitivity to global trade
Stalled wage growth
Demographic challenges
Emerging
Markets
Attractive equity valuations
Commodity price stabilization
Stronger economic growth
Rising U.S. dollar
Sensitivity to global trade
Subject to large capital swings
23 23
Global Sector Market Summary
Source: T. Rowe Price.
Positives Negatives
Consumer E-commerce
EM consumption
Protectionism
Fierce competition
Energy/Materials OPEC production cuts
Short-term price stability
U.S. shale supply coming
Strong U.S. dollar
Financials Rising interest rates
Deregulation
Weak credit demand
Negative interest rates
Technology/
Health Care Secular growth opportunities
Exciting new products
Protectionism
Price controls
Industrials Infrastructure initiatives
Quality, durable cyclicals
Expensive valuations
Infrastructure takes time
24 24
Overview and Summary
Globalization and nationalism have always been awkward dance
partners
Focus on policy adjustments and their impact
Near-term potential for faster global growth and higher interest rates
Significant risk of underwhelming policies relative to market
expectations
Renewed prospects for financials
Long-term secular and durable growers remain attractive
Source: T. Rowe Price.
25 25
Additional Disclosures
Philippines – Rodrigo Duterte
Image: By Presidential Communications Operations Office [Public domain], via Wikimedia Commons from Wikimedia Commons
UK – Theresa May
Image: By Andrew Burdett (Transferred from en.wikipedia to Commons.) [CC BY 3.0 (http://creativecommons.org/licenses/by/3.0)], via Wikimedia Commons from Wikimedia Commons
U.S. – Donald Trump
Image: By Gage Skidmore from Peoria, AZ, United States of America (Donald Trump) [CC BY-SA 2.0 (http://creativecommons.org/licenses/by-sa/2.0)], via Wikimedia Commons from
Wikimedia Commons
Netherlands – Geert Wilders
Image: By Wouter Engler (Own work) [CC BY-SA 4.0 (http://creativecommons.org/licenses/by-sa/4.0)], via Wikimedia Commons from Wikimedia Commons
France – Marine Le Pen
Image: By Marie-Lan Nguyen (Own work) [CC BY 3.0 (http://creativecommons.org/licenses/by/3.0)], via Wikimedia Commons from Wikimedia Commons
Germany – Martin Schulz
Image: Foto-AG Gymnasium Melle [CC BY-SA 3.0 (http://creativecommons.org/licenses/by-sa/3.0)], via Wikimedia Commons from Wikimedia Commons
Italy – Beppe Grillo
Image: By Lucarelli (Own work) [CC BY-SA 3.0 (http://creativecommons.org/licenses/by-sa/3.0) or GFDL (http://www.gnu.org/copyleft/fdl.html)], via Wikimedia Commons from Wikimedia
Commons
Mexico – Andrés Manuel López Obrador
Image: By Mexicanos Sin Fronteras (Ricardo Juarez y Andrés Manuel López Obrador) [CC BY 2.0 (http://creativecommons.org/licenses/by/2.0)], via Wikimedia Commons from Wikimedia
Commons
Self-Driving Car:
Image: By Dllu (Own work) [CC BY-SA 4.0 (http://creativecommons.org/licenses/by-sa/4.0)], via Wikimedia Commons from Wikimedia Commons
Parked Bus:
Image: By Intel Free Press (Bus wrapped with SAP Big Data parked outside IDF13) [CC BY-SA 2.0 (http://creativecommons.org/licenses/by-sa/2.0)], via Wikimedia Commons from
Wikimedia Commons
Drone Delivery:
Image: By Tim Cox PhotoGraphics, Inc (Flirtey) [CC BY-SA 3.0 (http://creativecommons.org/licenses/by-sa/3.0)], via Wikimedia Commons from Wikimedia Commons
Robotics:
Image: By Orange Indus (FANUC Robotics Deutschland) [CC BY 3.0 (http://creativecommons.org/licenses/by/3.0)], via Wikimedia Commons from Wikimedia Commons
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