Globalization has been in decline since the credit crisis. In his latest paper ‘Will globalization survive covid-19?’ UBS Asset Management’s chief strategist Massimiliano Castelli questions if the impact of the pandemic will be severe enough to turn this 'slowbalization' into outright deglobalization. He advocates a regional investment approach in which traditional benchmarks are abandoned.
According to the World Bank, the COVID-19 global recession will lead to the broadest collapse in per capita incomes since 1870, Castelli says. “We believe the rise in poverty in advanced and emerging markets coupled with the loss of jobs as digitization accelerates will fuel populism in the years to come.”
Driven by technological changes, tariffs and populism, two of the three pillars of globalization are already in decline, he adds. “These include the free movement of people and goods and the free movement of capital. The latter has been under attack for a while and data points to broadly falling global capital flows.”
If you look at how COVID-9 impacts the dynamic of globalization, Castelli believes, the trends that where already underway before the crisis will continue and, in some cases, become stronger.
“One possible outcome could be increased regionalization of the world. It is yet unclear in what form and under which institutional setup new regional blocks, for example in Asia, could organize. Also, the relations of these blocks to the rest of the world as well as 'within' members could manifest in many ways, with different possible outcomes for globalization.”
Nevertheless, the pandemic is causing a different kind of globalization in certain areas, he says. “The pandemic highlighted to large parts of the global population that we are facing certain global problems together on this planet; a feeling that climate change was never really able to fully mobilize. This unleashed unprecedented levels of international cooperation and feelings of global unity. The pandemic will probably also push the globalization of data to the next level which allows it to finally claim its rightful place as a key factor of globalization.”
Small economies will profit
Who will benefit the most from deglobalization? Castelli: “The 2020 IMD World Competitiveness rankings have shown that the top-5 most competitive economies are all relatively small. The ranking is topped by Singapore, Denmark, Switzerland, Netherlands, and Hong Kong. We believe successful countries in the coming years will be (1) those with strong institutions that are able to build social consensus around policies; (2) small economies that enjoy the protection of nearby, large markets, be them China or Europe; and (3) countries with healthy finances who can support the domestic economy in the most devastating crisis of the last decades.”
According to Castelli, investors need to devise a long-term strategy to benefit from the winners of the pandemic. "This requires a regional investment strategy on a country-by-country basis that goes beyond the traditional distinction between developed and emerging markets and has the courage to abandon traditional benchmarks. Diversification across asset classes is no longer sufficient; diversification across themes and regions can provide higher returns over the long term.”
Here you'll find the full report ‘Will globalization survive covid-19?’ from UBS Asset Management.