Trading is often driven by short-term price action, changes in investor sentiment and momentum. However, running alongside these short-term drivers there can also be big-picture thematic ideas at work.
These macro themes develop far less frequently than their short-term micro counterparts but their effects can be farther-reaching and longer-lasting, and may take years and perhaps even decades to fully play out.
Historic examples
Examples of these big-picture themes include the growth of consumerism in post-war America, the increased importance of energy and energy prices in the early 1970s, the emergence of the internet and the connected economy in the mid to late 1990s.
Which was followed by globalisation and the opening up of world trade and the supply chain.
Some of those themes persist to this day, true they have evolved and mutated from the original premise, but they’re still influencing the global economy and its markets.
Thinking again
However the events of the last three years have given us pause for thought.
The headlong rush to globalise trade and the supply chain was seen as a road map to prosperity for developed and developing economies alike.
However, a pandemic and a war in mainland Europe quickly exposed the pitfalls of that strategy when just-in-time supply chains couldn't cope and were quickly dislocated.
That dislocation showed itself in energy prices which slumped during the pandemic as economic activity contracted and storage facilities filled to the brim.
Source: Barchart.com
However, those same prices were catapulted higher just under two years later, in February 2022, as Russia launched an invasion of Ukraine starting a war that is still being fought today.
The move in oil prices was minuscule however, when compared to that seen in European natural gas, the fuel that provided a major portion of the continent's power. Much of that gas came from Russia.
And that led to the ludicrous situation of the EU sanctioning President Putin and Russia, whilst at the same time filling his coffers by being one of the largest consumers of Russian gas.
Even 18 months after the Russian invasion, Europe was still importing around 13% of its natural gas from Russia, according to European Commission data.
Not the only weak spot
The pandemic and concerns about expansionist regimes also exposed the vulnerability of the West in another key area, that of silicon chips the manufacturing of which is centred in Taiwan which China has never recognised as an independent state.
Some 60% of silicon chips are manufactured there. That figure rises to 90% if you only look at high-end devices.
China hasn’t chosen to enforce its territorial claims to Taiwan as yet, but the island is just 100 miles from the coast of the Chinese mainland, and so it’s well within China’s grasp should it choose to do so.
A new paradigm
All of the above has prompted a change in thinking among politicians and business leaders, who have concluded that being reliant on potential enemies for key raw materials and components, is not a tenable state of affairs.
Their new strategy is to try and reduce their dependence on competitor states, to create new supply chains and, where possible to onshore production of key components.
Of course, none of that can happen overnight, or in a vacuum, not least because of of the costs and logistical implications.
Globalisation meant offshoring production to China and elsewhere.
Typically these were low-cost economies with large workforces, at the same time factories and manufacturing plants in the US and elsewhere were scaled back or shut down completely.
Twenty years on that means that many of the necessary facilities, skills and cost bases required to bring production back onshore do not exist, and wouldn’t be economically viable even if they did.
Priced out of the market
Average wages in Chinese manufacturing are around $15,700 per annum, while a worker in the US, working a 40-hour week in manufacturing, could expect to earn an average of around $55,500, at current wage rates, according to the Bureau of Labor Statistics.
So if moving all production back onshore isnt economical viable what else can we do to derisk the global economy and supply chain?
Well, that’s where big-picture thinking and themes come back into the story, and give rise to the concept of the Multipolar-Economy.
The idea of the mult-polar economy is one where the Western and other economies are less reliant on major resource centres, such as China for manufacturing, and the Middle East for Energy. And instead move to a scenario where we reposition these key nodes or poles in the supply chain to “client” or friendly states, in what’s been termed friend-shoring.
States that will benefit from this transition include Vietnam, Mexico, Poland and India. The changes won’t happen overnight, of course, however, we can already see the groundwork being laid.
Making new friends
For example, US President Joe Biden visited Vietnam in September during that visit the two countries inked billions of dollars worth trade-deals, in areas such as aerospace and semiconductor design.
Marking the start, of what was described as, a major strategic partnership by US officials.
Vietnam has become Asia's fastest-growing economy in the last year and the US is its biggest export market.
The Polish stock market has already benefited from being in Europe but not in the Euro and is up some +38% in the last year.
Source: Trading Economics
Whilst Vietnam’s Ho Chi Min Index has added around 6.0% so far in November
Source: Trading Economics
In a recent note on the transition to the Multipolar-Economy, Morgan Stanley predicted that the cost of onshoring or repositioning EV battery production and its supply chain would reach $7.0 trillion over the next 20 years.
Whilst in a recent episode of its Exchanges podcast series Goldman Sachs looked at how emerging markets equities could catch up with, and perhaps over take the developed market counterparts in years to come - Growth in EM GDP is seen as an important indicator or proxy for this trend.
So it seems there is plenty in this developing story to keep traders occupied.
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