Global economic growth is faltering, and recessionary conditions are becoming evident
It is likely that growth in the service sector will also slow globally, but remain positive, especially in emerging markets. Focusing too much on the short-term, however, can obscure important long-term developments that are already visible.
As globalisation retreats, small manufacturing hubs will replace China’s export machineWe see an evolution in the nature of economic activity itself creating structural change in business, driven by geopolitics, demographics and climate change. China’s ascent to manufacturing primacy has changed the world order over the past two decades, but this position is now at risk from protectionism.
As globalisation retreats, small manufacturing hubs will replace China’s export machine, bit by bit. While the resulting localisation of production will circumvent any rises in tariffs, it will do so at the cost of lower economies of scale, lower productivity and efficiency.
Manufacturing’s contribution to global economic output has been in steady decline for several decades and should continue, but localisation also brings opportunity. This is because manufacturing is not standing still: it is adopting advanced technologies to improve efficiency and productivity.
The shift of manufacturing from China to other parts of the world will offer a fresh opportunity to design factories with smart technologies. Existing factories that are looking to move up the value chain or upgrade their offerings are also investing in advanced technologies. This is an attractive opportunity for businesses focused on driving efficiency such as automation, robotics and industrial internet of things.
In the smart manufacturing space, we would highlight a Taiwanese company, Advantech. Advantech is a global leader in industrial PCs and has successfully shifted its hardware-centric business model to incorporate advanced automation computing products, systems, services and software solutions.
Advantech benefits from a balanced exposure to the developed and emerging markets and the ongoing relocation of production from China to the Association of Southeast Asian Nations is a catalyst for the company.
Growth in global trade underperformed global GDP in four of the past eight years. Global trade is displaying characteristics like manufacturing with an ongoing pullback of trade further exacerbated by the trade war. The World Trade Organization expects world trade growth to pick up somewhat in 2020, but expects it to remain below the long-term average with a high degree of uncertainty given volatile conditions.
Nevertheless, trade is still relevant and intra-regional trade (for example, intra-Asia) is growing. Intra-Asia trade benefits from a growing population, rising penetration of e-commerce, deepening supply chains and increasing trade connections within the region.
For this reason, we like SITC International, a small-cap shipping and logistics operator with a niche in servicing intra-Asia trade flows. The company is benefiting from the resilience of this trade flow and a tight supply of small vessels.
Services contribute the majority of GDP and growth in many emerging and developed countries and are little impacted by tariff barriers. In addition, developments in digitisation, mobility, and the internet are driving the creation of new services.
Within the service sector, we would highlight ecommerce, digitalisation, financial services, logistics and healthcare. We are finding opportunities within the Brazilian health insurance industry, including Notre Dame Intermedica and Hapvida due to their vertically integrated model combining health insurance and hospital operations resulting in a cost advantage.
We believe that secular growth opportunities continue to present themselves in services, even as manufacturing and trade get disrupted due to protectionism.
Kunjal Gala is global emerging markets co-portfolio manager at Hermes Investment Management
