A man who withdrew into a remote cabin in northwest Vermont back in March has emerged from a 75-day silent retreat as part of a Buddhist monastic community. Opening Twitter on his return, he tweeted  “I’m back from 75 days in silence. Did I miss anything?” As one twitter user replied, he’s “missed history on steroids”!
It’s amazing to think how far the market has moved in 75 trading sessions given that it was exactly 75 sessions ago that the S&P 500 closed down for the day by more than -9.5%! Asset class returns in sterling and local currency are below; the S&P 500 has continued to give up some of its outperformance year-to-date as Covid-19 flare-ups occur across the US.
Figure 1: GBP total returns
Figure 2: Local CCY total returns
Since China joined the World Trade Organisation in 2001, the world has witnessed significant growth in global trade volumes, in part due to the ease with which companies have been able to organise operations on an international scale. This is part of a broader trend known to most as globalisation. There are numerous pros and cons to globalisation, and because of that it has become an increasingly political issue in recent years. Positives range from lower costs for consumers, a worldwide market for corporates, and broader international cooperation, while negatives include the transfer of jobs to lower cost countries, the risk of technology transfer (e.g. IP theft), and depressed wage growth in developed economies. Below we discuss two disrupting factors for the current established system.
The first is the uprising of populism globally. Indeed, at the core of Trump’s 2016 election promises was a protectionist commitment to relocate manufacturing jobs lost over the preceding decades back to the US. So far, Trump has pursued a strategy that resembles the mercantilism found in the 17th century: maximise exports, minimise imports, use tariffs and subsidies to protect domestic industries, and aim to reach a current account surplus. The most significant conflict since Trump’s election has been the US-China trade war which started in early 2018 and has since fully escalated from threats of tariffs on hundreds of billions of dollars in trade, to claims of intellectual property theft, to export controls. Though some commentators may dismiss this conflict as a Trump phenomenon and claim policy will return to “normal” if the Democrats win the 2020 election, what we find surprising is how widely supported a tough stance with China is and that numerous Democrat politicians support the current direction of travel.
|Figure 3: The US and China have relatively low total trade to GDP ratios which indicates that any significant breakdown in the global trading system is likely to create collateral damage
||Figure 4: China’s growing trade surplus has been a target for the Trump administration
|Source: World Bank, EQ Investors||Source: IMF, EQ Investors|
Another significant disrupting factor to global trade been the recent revelation by corporates that existing supply chains are too concentrated from a geographical standpoint. Discussions on this topic emerged in the Q1 US corporate earnings commentaries as China – one of the first to shut down its economy for Covid-19 related reasons – forced companies to shut down production lines. To avoid this sort of disruption in future, corporates will have a choice: either move some or all production from China with a view to becoming more geographically diversified, or to repatriate production with a view to collocating supply and demand.
So, what’s next for global trade? The above points paint a pretty glum picture for a bounce back to “normal” in the immediate term, but fortunately there are some signs of rebounding activity. The two charts below represent global bellwethers for shipping (Figure 5) and air freight (Figure 6). What is interesting is the extent to which demand for air freight seems to have increased versus shipping which would indicate exporters are seeking to make up for delays in output through faster means of delivery.
|Figure 5: While the Baltic Dry Index which represents demand for shipping has somewhat rebounded…
||Figure 6: …demand for air freight has
taken off as exporters make up for lost time
|Source: Bloomberg, EQ Investors||Source: Bloomberg, EQ Investors|
Should corporates move production outside China off the back of the Covid-19 lockdown, there are numerous countries in South East Asia or even Latin America that could benefit. The question for business will primarily be down to cost, and there’s no doubt that any move to realign or disentangle existing supply chains will be a challenge.
STAT OF THE WEEK: 4.5, 77 and 147 – the number of Covid tests carried out pe
r 1,000 people in India, the USA and Denmark respectively (Our World in Data).