The investment implications of deglobalization and geopolitics

Sammy Simnegar loves history and is a student of it. It was his major in his university days.

“I embrace the idea that history rhymes, but does not repeat,” Simnegar says.

Combined with his experience as an investment professional, Simnegar’s discerning eye for the underlying implications of complex global events allows him to unpack them and extricate potential investment opportunities.

Starting in 1998, his purview as a portfolio manager at Fidelity has spanned the globe, and has included real estate, U.S. banks, and emerging markets, and currently includes international—and U.S.-focused equity funds.

At the moment, he sees strong tailwinds around a multiyear theme tied to deglobalization and geopolitics—namely, a megatrend that ties together an odd couple.

“It’s a rare combination of market leadership right now,” says Simnegar. “The two sectors leading the way are technology and industrials—an unusual duo. Industrials are driven by shifts in manufacturing and stimulus to build new capacity in the U.S.; that means equipment rentals, cement, fans, and automation, for example. Energy transformation is also having an impact on industrials, particularly companies that might help grid transformation. At the same time, you have generative AI emerging, capex in semiconductors, a continuance of the shift from offline to online, and increased computational intensity. And then there are companies that are hybrid plays—technology helping automation, for example.”

The investment implications of these trends in industrials and technology are global, and multinationals everywhere could benefit, Simnegar says. “Along with U.S. companies, you have emerging market companies in the semiconductor space, for example,” he says, “and European and Mexican companies dealing in aggregates [sand, gravel, crushed stone, etc.] and cement, as another example.”

“Everything in life goes in cycles,” says Simnegar. “When China joined the World Trade Organization in 2001, there was a global boom. A lot of investment went into China, and we experienced a global supercycle in commodities led by emerging markets. The U.S. and Europe were riding China’s coattails.

From 2010 to 2020, we had the ‘Great Moderation,’ global growth slowed, bond yields went negative for an extended period, and GDP growth was low—including China, where it was still growing but decelerating.”

The knock-on effects of more recent events:

“In 2020, when China’s President Xi clamped down on some big domestic companies, it was game changer,” Simnegar says. “The private sector in China became part of the state, and the state took a heavy-handed approach to how business is conducted in China. That impacted foreign companies, too. As geopolitical tension between the U.S. and China increased, China saw U.S. sanctions on advanced technology as a hostile act. The mistrust and the forced transfer of technology triggered a massive global movement, now underway, to bring manufacturing back to home shores. I think the pandemic further exposed overreliance on suboptimal supply chains in some critical areas.”

Investment implications for the U.S.:

“Covid and the war in Ukraine led the U.S. to realize it didn’t have sufficient military equipment manufacturing capacity. The manufacturing base had been hollowed, and moved to Mexico and China,” Simnegar says.

“To regain that capacity, the U.S. is offering large subsidies. The CHIPS Act provides $52.7 billion for U.S. semiconductor research, development, and manufacturing, as one example. Overall, the Act directs $280 billion in spending over the next 10 years, including $24 billion worth of tax credits for chip production.”¹

What about outside the U.S.?

“There are also U.S. subsidies available for manufacturing, green energy, and blue hydrogen, for example,” Simnegar says. “To counter that, European nations have turned to their domestic manufacturing champions and agreed to match any subsidies offered by the U.S. In addition, U.S. subsidies are being offered to non-U.S. companies in friendly countries.

For example, South Korea can build semiconductor factories in the U.S. and receive compelling tax credits. It’s fascinating how much reshoring and onshoring is taking place. I don’t think anyone in the investing world would have ever believed we would see Japan have higher nominal GDP than China—but that was the case in Q2 of 2023.”

Will we start to see an uptick in productivity?

“There are already a lot of manufacturing jobs being brought back to the U.S.,” says Simnegar. “The labor market will probably stay relatively tight. There could be massive demand for machinery, automation, robotics, construction, cement, aggregates—a boom is taking shape, but we aren’t seeing it yet because the Fed has taken rates up. As a result, things have slowed down, but are still strong. For perspective, the total backlog of announced megaprojects is higher now than the entire decline of the commercial real estate market during the Global Financial Crisis [approximately $100 billion]. We are seeing productivity increase in real time, and the U.S. might disproportionately benefit. This trend might be a headwind for some industries in China, however.”

Are there opportunities in emerging markets ex-China and in frontier markets?

“ASEAN countries, such as Indonesia, Malaysia, and Vietnam, are increasingly destinations for manufacturing. And even though India doesn’t currently have a big manufacturing base, it is attracting increased investment. India is still a relatively poor country that has a lot of room for GDP growth. It’s relatively well-governed from a macroeconomic perspective, has good demographics, a strong high- tech sector, and they are working hard to improve the ease of doing business. For all those reasons, they might have the most promise among emerging markets. Central and South America are big commodity exporters, but politics are always getting in the way when countries try to move things in a better direction. Many African countries find themselves in the same situation.”

How might geopolitics affect strategic investing in more volatile and inflationary regime?

“There’s politics and then there is stock market investing,” Simnegar says. “The Philippines, for example, might not be selling any more ports to China because that didn’t work out to their benefit, and seems to want to side with the U.S., but that doesn’t have major investment ramifications. We have actions that are adding heat, such as China trying to cut a deal with Cuba to put a military base there. There’s nothing in which we can invest in Cuba—but that’s an example of how risk premia could increase globally due to greater uncertainty.

As an investor, it’s important to consider potential scenarios that can shift dynamics, and to identify what’s changing and incentives, such as keeping large populations from losing faith in the future. China might be the biggest geopolitical stress point for investors to think through—especially its direction in global relationships. The chances of China doing something aggressive might have gone up a little because that could help distract its population from a mismanaged economy. At the same time, they see what happened to Russia in Ukraine. China likely doesn’t want to see something like that in Taiwan.”

The opportunities in manufacturing will go far beyond the end products.

“We need to rebuild manufacturing infrastructure in the U.S., and other countries feel the same about fortifying their own capacity,” says Simnegar. “In the U.S., we’re not building out textile capacity, for example. We can do that already in friendly countries such as Vietnam and Mexico. But what’s the new technology we need that was previously sourced from China? Electric vehicle battery plants, semiconductor plants, compressors, solar, wind—all the new opportunities related to the energy transition will be incentivized in the U.S. There will be more automation in manufacturing, and higher-paying jobs, and a lot of them could be in business-friendly states. The energy transition also requires the grid to be modernized and built out. Second- and third-derivative investment ideas related to these massive trends might prove to be strong investments for the next 10 to 20 years.”