The Rise Of Regionalisation Offers Risks And Rewards: Franklin Templeton

Investors looking for opportunities in global markets need to pay attention to the post-COVID shift from globalisation to regionalisation, as countries take steps to secure their supply chains and protect their battered economies.

A recent megatrends investment forum hosted by Kim Catechis, investment strategist for the Franklin Templeton Investment Institute, turned its attention to the risk to the globalisation megatrend that has shaped global trade patterns for the past 50 years.

Alastair Reynolds, portfolio manager for Global Emerging Markets Strategies at Martin Currie and panellist at the event, noted: “Globalisation has proved a great boon for emerging market economies over much of the last 50 years, but looking forward, I expect that regional trade patterns will prove more influential than globalisation in determining the fortunes of emerging market companies.

“In the short term, this is likely to be most powerful amongst pan-Asian franchises, as I expect Asia to remain the most dynamic region on a global basis. It might also alter M&A preferences of companies away from seeking global expansion in favour of building regional dominance.

“So, near-neighbour acquisitions in Asia, Europe, Africa and the Americas may be a feature. Regionalisation could be motivated by serving regional preferences in financial services, infrastructure or consumer goods, or its motivations could be more political, such as in guaranteeing supplies of key commodities or inter-operability of technology and communications.

“A move from global ‘just-in-time’ supply chains towards more localised ‘just-in-case’ supply chains will necessitate a new wave of investment in fixed assets, which should be positive for capital goods companies, building materials and industrial real estate. There will also be a one-off step-up in demand as this new supply chain is stocked with inventory.

“However, the increase in activity required to create and stock a more localised supply chain will bring increased costs. Ultimately, someone must bear this cost, and this will present a new test to pricing power throughout industry supply chains.”

Sonal Desai, chief investment officer of Franklin Templeton Fixed Income and another panellist at the forum, added: “Rising protectionism, together with the pandemic, is driving changes in global supply chains and global trade. In the short term, these increase the risk of disruptions and related inflationary pressures.

“In the longer run, they will highlight the importance of well-developed local and regional supply chains, which could become a critical competitive advantage for countries and companies.”

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