Three ways the disruptions of 2020 will permanently change global investment

the disruptions of 2020 will permanently change global investment

By Ivan Illán

The global economic disruptions of 2020 were not unprecedented, but they were very different from the market disruptions of 2007 for example because nobody saw it coming – and very few were prepared for the massive global shutdown that occurred as a result of the COVID-19 pandemic. Now we have a vaccine, and by year’s end this horrendous virus may be under control – but the biggest risk now lies in assuming that global economies and supply chains, and consequently global investments, will return to normal. They will not.

Big changes were already coming.

The pandemic has been a major catalyst for change, but it cannot be seen in isolation. As disruptive as it has been, the pandemic is in reality one of many such catalysts of the past few years that wrought major, and sometimes unexpected results in the global economy, global business environment and global investment landscape.

The pandemic served as a disastrous follow-on to multiple factors, resulting in a confluence of events for which the pandemic was merely the tipping point. The first factor was the reality that the manufacturing and heavy industry Renaissance hopefully desired in some political and economic spheres was simply not to be. The balance of power has shifted towards technology-based manufacturing and automation, the result being a dramatic increase in productivity, requiring less manpower on the factory floor and more on the technology development side. In those rapidly diminishing manufacturing scenarios where low-skill, low-tech shop ecosystems are still required and labor arbitrage still presents an advantage, Southeast Asia, Mexico and South America will continue to fill that need.

Available robust collaboration technology, a ubiquitous internet and a highly educated workforce in China and other Asian countries further means that those technology services which power modern manufacturing knows no borders. Adding to that the fact that the Chinese government has placed, for the last several years, very high priority on STEM education and the development of its tech industry, industry is no longer as provincial as it once was. Manufacturing is global – and that genie will not be put back into its bottle.

The global manufacturing footprint was not in itself a net negative for the domestic economy, but the response to it was. Two things happened over the last few years that set us on a dangerous path: Punitive tariffs and a trade war that did not accomplish its stated goals, and a tendency to seriously underestimate the economic strength and technological sophistication of China.

The economic fallout of a poorly thought out tariff structure, followed by the economic fallout of pandemic-driven global shutdowns was too much for the global economy to bear. In fact, US trade deficit has risen over the past few years, the polar opposite of intended consequences.

The West’s big mistake: Underestimating China.

Before COVID-19, few people in the West had heard of the city of Wuhan, and those who had did not understand its strategic importance to global industry. The city pushed its way into the Western mindset as Americans became aware of the existence of something called a “wet market,” a type of outdoor fresh food market commonly seen throughout Asia. Wuhan however, besides being like every other Asian city in its hosting of wet markets, is one of the largest industrial centers of China, and more importantly, it is one of the largest transportation hubs. Chances are, if a US-based company has any sort of component part coming out of China, that part, at some point in the supply chain, passed through a railyard in Wuhan. It is the Chicago of China. The government’s shutdown of that city immediately after the pandemic had repercussions in supply chains throughout the world.

The West’s first big mistake was in underestimating the growth and strategic global importance of the Chinese economy. Nationalistic fervor notwithstanding, the domestic economy would collapse without its organically grown Chinese connection. Politics aside, China and the US have developed a symbiotic relationship, especially as China has grown far more capitalistic and free market based than the politburo might want to admit publicly.

China’s rapidly growing middle class – and indeed the presence of many millionaires within the country’s borders – has given rise to a growing appetite for luxury goods from Europe, and on the industrial and financial side, knowledge based services from the West.

What will 2021 look like?

Confused investors anxious for a return to pre-pandemic norms will be disappointed, but those who understand the changing dynamic will be able to roll with the changes. One of the biggest factors in the machinations of industry is the supply chain, which was dramatically changed by the pandemic (and before that, the trade war). And while the politically astute may have predicted industrial disruptions resulting from the trade war, nobody saw COVID-19 coming. Not all global companies were completely blindsided though – those that had a supply chain strategy in place that included supply chain contingencies, risk management and did not rely on the easier path of least resistance have already come out ahead. Conventional wisdom in sourcing has always held a basic, cost-based focus, which led to a single-source or single-region supply chain in which the cheapest supplier wins, which works wonderfully until something like a devastating virus shuts down China’s industrial centers for an extended period of time. Supply chain managers may not have seen COVID-19 coming, but the more savvy among them prepared for it by building in a degree of optionality. Now others are seeing the wisdom of this strategy, and the result will be a permanent shift in supply chain strategy – which in turn changes the dynamic of where the money is going.

Another major change in 2021 that will become more evident is the United States’ inexorable move towards a service-based economy. That the US was the world’s leader in manufacturing from the ‘50s through the ‘70s was a post-war anomaly, a boom that was destined not to last as the rest of the world has finally caught up to the US to achieve a level of parity in manufacturing presence and sophistication.

Let us not equate service-based economy though, with low-wage, low-impact work: Much of service-based work is rooted in sophisticated technology and solutions. The shift towards a service economy does not mean we will become a nation of Walmart greeters and grocery store stockboys; export-ready service sectors include technology-as-a-service, and increasingly, services related to the financial industry (already a major source of US trade surplus) especially as China and other Asian countries see a dramatic increase in personal wealth, and those wealthy grandees in Beijing, Shanghai, Shenzhen and other destinations now look towards the West for the financial services required for that nation’s new crop of millionaires.

More than any other change afoot though, the biggest change in 2021 is the realization that first, pre-pandemic normalcy will never return, and second, that’s not necessarily a bad thing. Companies being better prepared for unexpected emergencies, the emergence of new global markets and growth of lucrative domestic service-based industries will all be part of a permanent change. Will there be that manufacturing Renaissance, the return of massive steel mills and American dominance of heavy manufacturing? Unlikely. But in the end, we don’t need it, and the country will prosper as a result of this paradigm shift. Basic economics touts the mutual benefits of comparative advantage.

Global opportunities for the savvy investor in 2021 and beyond.

Opportunities in 2021 and beyond may be less dominated by heavy manufacturing, and more on the technology and global collaboration tools that power it. China will continue to represent a growing market for the US, especially as the country and its citizens grow wealthier, and the government takes on a greater willingness to allow foreign entities to operate more freely and without the joint venture overlay that was previously required.

About the Author

Ivan Illán

Ivan Illán is an award-winning financial services entrepreneur and author of Success as a Financial Advisor For Dummies. He is Founder and Chief Investment Officer at Aligne Wealth Advisors Investment Management (AWAIM), offering proprietary global macro investment strategies through MML Investors Services, LLC, a registered investment advisor.

The views expressed in this article are those of the authors and do not necessarily reflect the views or policies of The World Financial Review.