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The last 50 years were defined by globalization.
Globalization refers to the increasing interconnectedness and interdependence of countries, economies, and cultures around the world.
This “mega trend” from the 1960s to present brought about the rise of China, the spread of Western culture around the world, and - for better or worse - the establishment of global institutions like the International Monetary Fund and the World Bank.
But globalization is about to go in reverse, and you need to prepare your portfolio for this inevitability…
…as many of the strategies that worked under globalization will not work under this new economic model.
And that economic model is deglobalization.
Where We’re Coming From…
The 20th century was defined by advances in transportation and communication that allowed economies to work together.
This is known as globalization.
For example, Apple is a company that embraced globalization. The company offshored much of its manufacturing to China, particularly its batteries:
Apple did this because labor in China was much cheaper than the US, allowing the company to generate more profits than its competitors.
But now Apple is moving away from this model:
The COVID-19 pandemic, unilateral lockdowns by the Chinese government, and strained geopolitical relations exposed a weakness in the globalized model.
Now, even the chief beneficiaries of globalization like Apple are changing course:
But while globalization was China’s gain, deglobalization will benefit other countries.
…And Where We’re Going
The United States - and companies like Apple domiciled there - are investing heavily to bring manufacturing capacity back to the homeland with an aim to be less reliant on the globalized model.
And this trend is only just beginning; while trade between the US and China hit a record high in 2022...
...China as a whole accounts for a smaller section of the US trade mix, falling from 24% to 16% in the last two years alone.
It’s clear companies are moving away from China. But the big question is: where are they moving to?
I have a feeling it’ll be closer than most people think.
Our Neighbors to the South
There are a few countries that stand to benefit from deglobalization.
One of which is America’s largest trading partner: Mexico.
Mexico has long been a manufacturing powerhouse, with a strong industrial base and a strategic geographic location on America’s southern border. But as global supply chains become more fragile and deglobalization arises around the world, Mexico's proximity to the United States will become an even greater asset.
American companies that once looked to China and other countries for cheap labor and easy access to global markets are now turning to Mexico as a more reliable, closer-to-home option. And as more companies move their operations to Mexico, the country's economy stands to benefit greatly.
But it’s not the only country poised to ride the de-globalization train.
India is Eating China’s Economic Lunch
Many of you already know India has long been known as a hub for outsourcing.
Whether its IT services or call centers, India’s low wages and high number of English speakers has been a direct beneficiary of globalization…
…but it's also quietly building up a robust manufacturing sector of its own.
This is mainly due to India’s favorable demographics. The country is now the world’s most populous, officially surpassing China this week:
But unlike China, India has a growing population of young people. In fact, the average age in India is 28 compared to 38 for China:
With a population of over 1.3 billion people, India has a huge domestic market that can sustain local manufacturing, reducing its reliance on global trade.
And as India continues to develop its infrastructure and improve its business climate, more and more companies will be drawn to the country as a manufacturing hub.
Deglobalization Has Just Begun
Mexico and India are two countries that are poised to benefit greatly from the ongoing shift towards deglobalization.
That should benefit the companies in the countries who take advantage of this mega trend, benefitting Mexican and Indian ETFs like the iShares MSCI Mexico ETF (EWW) and the WisdomTree India Earnings Fund (EPI).
Whether it's their proximity to major markets or their growing local production capabilities, these countries have what it takes to thrive in the new global landscape.
Keep your eye on these two rising stars, because they're going to be major players in the years to come.
Stay safe out there,
Robert