The deglobalization myth(s)
A new paper in the Megatrends series examines global trade growth and concludes that growth likely will slow but not decline.
What slowing global trade growth means for asset prices
Vanguard has emphasized over the last 12-plus months that the COVID-19 pandemic would accelerate trends already in place. One of these trends is the shortening, and in some cases the reshoring, of supply chains, as business leaders question whether their supply chains have been stretched too far and become too complex.
Such a trend raises a natural question: Is globalization dead?
New Vanguard research, “The deglobalization myth(s),” concludes that, no, globalization isn’t dead. Instead, global trade growth is likely to slow, as it’s been doing since the 2008 global financial crisis (GFC). Our research concludes that this slowing in global trade growth, what we term “slowbalization,” is unlikely to turn into a contraction in global trade. What’s more, the implications for investors are only modest.
A slowbalization scenario is the most likely outcome
Sources: Vanguard calculations, using data from the World Bank, the Organisation for Economic Co-operation and Development, and the KOF Swiss Economic Institute.
The allure of global trade is understandable. Companies that produce goods or provide services want the largest possible markets for their outputs. But a structural expansion in supply chains, which boosted gross trade in the 1990s and early 2000s, started to slow even before the GFC. A turn toward protectionism—government policies that favor domestic industries—over the last decade in the face of rising inequality in developed economies is likely to similarly tap the brakes on global trade.
We note that other aspects of globalization, including international capital flows, knowledge sharing, and geopolitics, carry potentially significant economic, societal, and environmental consequences. In our latest research, we focus on just one aspect of globalization that addresses a specific concern of investors: the trade of goods and services.
The concern is that slowing global trade growth may reduce corporate earnings and profit growth and, by extension, weigh on equity prices. After all, a globalization wave that began in the 1990s coincided with a sixfold increase in Standard & Poor’s 500 Index earnings per share and more than a doubling of profit margins, contributing to almost 90% of the index’s price return over most of three decades.1
Risks to investors may not be as great as they seem
But we contest the view that globalization has been the central factor in the expansion of these return drivers. Our research demonstrates an inconclusive or weak relationship between earnings growth and changes in trade dependency. And it shows that industries with the greatest increase in profit margins since 1990—finance and insurance, and office and computer machinery are examples—have experienced only modest changes in trade dependency.
Trade tensions that precipitated sharp bouts of market volatility just a few years ago underscore the importance that investors ascribe to global commerce with few impediments. No doubt, geopolitical risks are ever present and worthy of attention. But our new research quantifies risks related specifically to a future of slowing global trade growth, and we believe that these risks to investors aren’t as large as they’re sometimes portrayed.
Rather, we emphasize conclusions shared by our new research and our December 2020 research “A Tale of Two Decades for U.S. and Non-U.S. Equity”: that corporate earnings growth hasn’t been a major contributor to U.S. equity outperformance in the past and that we shouldn’t expect it to have a meaningful impact on future outperformance or underperformance. Valuations, or the price investors pay for earnings, represent the most important signal for future asset returns. (A recent blog by Vanguard’s global chief economist, Joe Davis, further discusses what high U.S. equity valuations suggest for returns in the decade ahead.)
1The average annual S&P 500 Index price return from 1990 to 2018 was 7.4%. Three factors make up this return: valuation expansion/contraction (dollar paid per dollar of earnings), earnings growth from revenue growth, and earnings growth from ratio of earnings to revenue (profit margins). Contributions from these factors were 0.8%, 3.7%, and 2.9%, respectively.Past performance is no guarantee of future returns. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index.
Notes:
All investing is subject to risk, including the possible loss of the money you invest.
For institutional and sophisticated investors only. Not for public distribution.
Important Information
VIGM, S.A. de C.V. Asesor en Inversiones Independiente (“Vanguard Mexico”) registration number: 30119-001-(14831)-19/09/2018. The registration of Vanguard Mexico before the Comisión Nacional Bancaria y de Valores (“CNBV”) as an Asesor en Inversiones Independiente is not a certification of Vanguard Mexico’s compliance with regulation applicable to Advisory Investment Services (Servicios de Inversión Asesorados) nor a certification on the accuracy of the information provided herein. The supervision scope of the CNBV is limited to Advisory Investment Services only and not to all services provided by Vanguard Mexico.
This material is solely for informational purposes and does not constitute an offer or solicitation to sell or a solicitation of an offer to buy any security, nor shall any such securities be offered or sold to any person, in any jurisdiction in which an offer, solicitation, purchase or sale would be unlawful under the securities law of that jurisdiction. Reliance upon information in this material is at the sole discretion of the reader.
Securities information provided in this document must be reviewed together with the offering information of each of the securities which may be found on Vanguard’s website: https://www.vanguardmexico.com/web/cf/mexicoinstitutional/en/home or www.vanguard.com
Vanguard Mexico may recommend products of The Vanguard Group Inc. and its affiliates and such affiliates and their clients may maintain positions in the securities recommended by Vanguard Mexico.
ETF Shares can be bought and sold only through a broker and cannot be redeemed with the issuing fund other than in very large aggregations. Investing in ETFs entails stockbroker commission and a bid-offer spread which should be considered fully before investing. The market price of ETF Shares may be more or less than net asset value.
All investments are subject to risk, including the possible loss of the money you invest. Investments in bond funds are subject to interest rate, credit, and inflation risk. Governmental backing of securities apply only to the underlying securities and does not prevent share-price fluctuations. High-yield bonds generally have medium- and lower-range credit quality ratings and are therefore subject to a higher level of credit risk than bonds with higher credit quality ratings.
There is no guarantee that any forecasts made will come to pass. Past performance is no guarantee of future results.
Prices of mid- and small-cap stocks often fluctuate more than those of large-company stocks. Funds that concentrate on a relatively narrow market sector face the risk of higher share-price volatility. Stocks of companies are subject to national and regional political and economic risks and to the risk of currency fluctuations, these risks are especially high in emerging markets. Changes in exchange rates may have an adverse effect on the value, price or income of a fund.
The information contained in this material derived from third-party sources is deemed reliable, however Vanguard Mexico and The Vanguard Group Inc. are not responsible and do not guarantee the completeness or accuracy of such information.
This document should not be considered as an investment recommendation, a recommendation can only be provided by Vanguard Mexico upon completion of the relevant profiling and legal processes.
This document is for educational purposes only and does not take into consideration your background and specific circumstances nor any other investment profiling circumstances that could be material for taking an investment decision. We recommend to obtain professional investment advice based on your individual circumstances before taking an investment decision.
These materials are intended for institutional and sophisticated investors use only and not for public distribution.
Materials are provided only for their exclusive use and shall not be distributed to any other individual or entity. Broker-dealers, advisers, and other intermediaries must determine whether their clients are eligible for investment in the products discussed herein.
The information contained herein does not constitute an offer or solicitation and may not be treated as such in any jurisdiction where such an offer or solicitation is against the law, or to anyone for whom it is unlawful to make such an offer or solicitation, or if the person making the offer or solicitation is not qualified to do so.