Market commentary: May 2024

Investment performance

The standout performer continues to be our international share strategy returning over 20% for the year largely driven by the ‘Magnificent 7’ US tech companies. One of these is Nvidia, a company that designs and supplies computer chips and software and hardware for artificial intelligence (AI). Over the last two years the share price of this business has tripled! Shades of the Dotcom bubble in the late 1990’s? It seems not. Firstly, Nvidia generates real profits and, like it or not, AI is seen as transformational.

While this is impressive, it’s important not to get too swept up in the excitement of AI. Successful investors look at the potential impact of long-term trends. One of these is deglobalisation…

Deglobalisation – what does it mean for international share markets?

Globalisation of free trade since the end of World War II has driven rapid technological development and lower priced goods and services. Today one can purchase goods from anywhere in the world and geographic distance is no longer a barrier for many services to happen. The result is rising global incomes and cheaper (and better) goods and services.

However, we are now seeing a reversal of globalisation. Rising inequality (leading to popular disillusion with globalisation) contributed to Brexit, increased trade protectionism, and hostility toward migration. Increasing trade tensions with China, and the Covid pandemic accelerated this reversal. Supply chain issues have exposed the dangers of over reliance on free trade.

As a result, the global economy is showing signs of what has been called ‘The great Separation’ as the world divides into trade blocs centred around either the USA or China.

This is resulting in businesses facing a far more complex web of rules regarding exports, sourcing of components, and worker movement. Chinese companies are facing protectionism and paying higher tariffs when exporting to western countries.

The forces driving deglobalisation are long -term trends, with long term impacts on share markets. As investors, we need to consider how earnings of companies could be affected given possible scenarios.

For example, earnings of companies manufacturing in one bloc but exporting to the other are vulnerable if market access is interrupted at short notice. Supply chain issues are a risk to companies that rely on the import of key raw materials across the two trading blocks.

On the other hand, deglobalisation brings some exciting opportunities. Geopolitical tensions and supply chain disruption have led to the USA, EU, and Japan to incentivise the reshoring of critical manufacturing. A good example is Taiwan Semiconductor Manufacturing Company building a $US 40 billion manufacturing plant in Phoenix Arizona to secure US supply of computer chips.

Understanding the long-term impact of these themes is critical to identifying companies that will prosper in a less globalised world and therefore deliver sustainable growth.

Richard Grimes, CERTIFIED FINANCIAL PLANNER (CFP^CM), Director and Financial Adviser