Navigating the Waves of Deglobalisation: Its Impact on Thematic Investing

In a world where geopolitical tension, supply chain disruptions, and concerns over energy security are increasingly becoming the norm, the globalised order of the last three decades is facing an unprecedented challenge. The evolving landscape of deglobalisation is set to profoundly impact various investment themes, with an emphasis on smart manufacturing, energy transition and climate change, and the circular economy.

Riding the Tide of Manufacturing Reshoring

Over recent years, we’ve seen a significant shift in manufacturing trends. Manufacturers have been reshoring, or “near shoring”, their production processes to bring them closer to their home markets. A trend precipitated by a desire to ensure manufacturing independence, reduce reliance on foreign supplies and potentially disruptive global supply chains, especially in the wake of geopolitical tensions and the Covid-19 pandemic.

Leading the reshoring trend is the semiconductor industry. Amidst growing concerns about overdependence on China for high-end semiconductors, the US passed the Chips Act in 2022, allotting $52.7 billion for semiconductor R&D and manufacturing. Likewise, the Inflation Reduction Act mobilises $1.5 trillion into clean energy, including advanced manufacturing production credits. Europe has also followed suit, launching the Green Deal Industrial Plan with €390 billion in funding for strategic technologies such as solar and wind energy, heat pumps, and batteries.

Such initiatives are aimed not only at ensuring a secure supply of critical technologies but also at generating skilled jobs and maintaining competitiveness in a rapidly changing global landscape. They highlight the potential rewards for smart manufacturers, the pioneers of sustainable innovation in hardware, software, and new materials.

Moreover, as labour shortages begin to bite and wage rates rise, there is a compelling case for increasing automation in manufacturing processes, made even more attractive by advancements in artificial intelligence, robotics, and other innovations. Hence, manufacturers focusing on equipment such as robotics or sensors are likely to emerge as winners in this reshaping landscape.

Necessity of Energy Security

Global warming and the ensuing need to transition from fossil fuels to renewable energy is a widely acknowledged issue. But the recent Russia-Ukraine conflict has amplified another vital reason – energy security. The volatile natural gas prices in the wake of the crisis have underscored the risks of relying on external energy supplies.

Countries can achieve energy self-sufficiency by investing in renewable sources like wind, solar, wave, and biomass power. This has triggered significant government stimulus in renewable energy, including the US’s IRA and EU’s GDIP.

While the Covid-19 pandemic has undoubtedly rattled the energy sector with disrupted supply chains, higher raw material costs, and logistical issues, the effects are predominantly short-term. The long-term structural shift towards renewable energy, catalysed by governmental efforts to enhance energy security, could benefit global operators in the energy transition space significantly.

The Circular Economy: Keeping it Local

The deglobalisation trend also aligns seamlessly with the circular economy theme. A circular economy aims to replace the linear “take-make-waste” model with one that keeps goods and materials in circulation for as long as possible. By designing products with efficiency, reusability, and recyclability in mind, we can drastically cut down on waste and pollution.

Adopting local supply chains in a circular economy can reduce dependence on distant suppliers, streamline logistics, and lower energy consumption. These changes are not only beneficial from an environmental perspective but also serve to enhance economic resilience in an era of increasing supply chain disruptions.

Concluding Remarks

In conclusion, while the challenges to globalisation undoubtedly bring a certain level of uncertainty, they also offer an opportunity for reimagining and reconfiguring investment strategies. Themes like smart manufacturing, energy transition, and the circular economy are particularly poised to benefit from this new environment. Investors who can adeptly navigate these changes will likely find substantial rewards amidst the challenges.