At the start of the year, governments globally delayed unprecedented measures to support both people and businesses during the pandemic. The implications of these policy measures are likely still to be felt once the pandemic has receded and accelerated already established trends including sustainability and de-globalisation.
In terms of the acceleration of the de-globalisation trend, Barclays Bank reported in August that since the early 1990s, global trade expanded enormously. By the time of the financial crisis in 2008, global trade represented nearly 25% of global GDP. However, WeForum reports that world trade is expected to contract between 13% and 32% in 2020.
As such the pandemic has revealed the risks associated with globalisation and particularly the risks involved with China’s ‘just in time global supply chains’ that relied on a time sensitive delivery of intermediary goods and for production to take place. If lockdowns continue to be a part of our new normal, global supply chains will no longer be able to deliver on time and will grind to a half intermittently. As such, this has created a new focus surrounding resilience in supply chains as the virus has highlighted weak points and blind spots within the pre-crisis infrastructure. In order to be resilient, we will see more supply chain strategies shifting from ‘just in in time’ to ‘just in case’.
In addition to this, it is worth noting that China has become the primary or in some cases, the only source for certain inputs, particularly in information and communication technology categories. (Barclays Bank) China is the largest source for important for all core economic regions with about one eighth of global exports flowing from the country. Thus many markets have a supply dependency on China: In US, 18.1% of total imports come from China. For Japan, it is 23.5% and the EU has 20.4% (US Census Bureau, Japan Customs and Tariff Bureau, Eurostat, Barclays Research). With the uncertainty of the health crisis still looming, dependence on China could be problematic and force multinational corporations to reconsider their supply chains and trade less with China and perhaps attempt to re-shore some production to domestic suppliers.
At the same time, the health crisis has raised awareness of the potential consequences of a future climate-related crisis (Luxembourg Trade & Invest). In response to this, governments have begun to strategise for a more sustainable recovery and greener rebound (The Financial Times). According to the words of the OECD; ‘recovery plans will need to include dimensions such transitioning to renewable energy, embracing working in a circular economy and rethinking food value chains to make them more localised and eco-friendly’. (Luxembourg Trade & Invest). Thus, our postCOVID19 economy will see more investments in sustainable infrastructure.
Whilst sustainability is not new and its importance has already been felt in the acceleration of ESG investments, the pandemic has shun a light on the importance of resilience of sustainable markets. We are living with the potential threat of continued lockdowns and great uncertainty. In order to build a resilient future, focusing on sustainable and de-globalised strategies and supply chains will be critical.
ESG has of course become a critical aspect of how money is invested and managed, something that Linear DFM has been keen to implement across all of its model portfolios.