Deglobalization

Deglobalization is the process where economic, political, and social integration between countries slows down or reverses. Think of it as the world taking a step back from the hyper-connected, “borderless” era of Globalization that dominated the late 20th and early 21st centuries. Instead of companies chasing the lowest costs anywhere on the planet, we're seeing a shift toward regional trade blocs, national interests, and a greater emphasis on security and resilience. This isn't about countries building walls and cutting all ties; rather, it’s a fundamental rewiring of the global economy. The long, intricate Supply Chains that once crisscrossed the globe are being shortened and simplified. Production is moving closer to home, and political alliances are starting to matter just as much as economic efficiency. This trend is driven by a cocktail of factors, including geopolitical rivalries, the vulnerabilities exposed by the COVID-19 pandemic, and a rising wave of Protectionism. For investors, this is a sea change that reshapes risks and creates a whole new set of opportunities.

Deglobalization isn't happening in a vacuum. It's a reaction to several powerful global forces that have converged over the past decade. Understanding these drivers is key to seeing where the investment world is heading.

• Geopolitical Rifts: The gloves are off between major world powers. Strategic competition, most notably between the U.S. and China, has led to trade wars, Tariffs, and restrictions on technology and investment. Countries are increasingly choosing sides, forcing companies to navigate a world fractured by political fault lines.
• Supply Chain Fragility: The pandemic was a brutal wake-up call. When a single factory shutdown in one country could halt production worldwide, companies realized their hyper-efficient supply chains were also incredibly fragile. Events like the war in Ukraine and shipping disruptions have only reinforced the lesson: reliability is the new efficiency.
• National Security Comes First: Governments now view industries like semiconductors, pharmaceuticals, green energy, and even food production as vital to national security. This has triggered a surge in policies designed to bring production back home (Onshoring), move it to neighboring countries (Near-shoring), or shift it to politically aligned nations (Friend-shoring).
• The End of “Cheap”: The massive cost advantage that once lured companies to offshore production has been shrinking. Rising wages in countries like China, coupled with higher transportation costs and the hidden expenses of Geopolitical Risk, have made the economic calculation far more complex.

For decades, the winning formula was simple: invest in Multinational Corporations that masterfully cut costs by globalizing production. Deglobalization flips that script. As a Value Investing practitioner, you must adapt your analysis to this new reality.

This new era will create clear winners and losers based on how well companies adapt their business models.

• Potential Winners: Businesses that enable this shift will thrive. Think robotics and automation firms that make domestic manufacturing competitive, logistics companies specializing in regional transport, and industrial players building the new factories. Companies with strong domestic demand and secure, local supply chains are also well-positioned.
• Potential Losers: Companies deeply entangled in complex, globe-spanning supply chains face a painful adjustment. Those heavily reliant on a single, geopolitically risky country for manufacturing or sales are particularly vulnerable. The “move fast and break things” ethos of globalization now carries significant, tangible risks.

The core principles of value investing—finding great companies at fair prices—remain unchanged. However, what makes a company “great” in a deglobalizing world is different.

1. Focus on Resilience: Look for businesses with a durable Competitive Advantage that isn't dependent on a fragile global system. Ask critical questions: How diversified is the company's supply chain? Does it have strong Pricing Power to manage rising costs from Onshoring? A fortress balance sheet becomes even more valuable in an uncertain world.
2. Price in Geopolitical Risk: Your fundamental analysis must now include a geopolitical audit. Where are the company’s key factories, suppliers, and customers? Exposure to political hotspots is no longer a footnote; it's a central risk that can impact future cash flows and should be reflected in the price you're willing to pay.
3. Rethink Capital Allocation: Deglobalization requires immense investment. Companies will be pouring money into new factories, technology, and logistics. This Capital Expenditure cycle creates opportunities in sectors like industrials, materials, and technology. Look for businesses that will benefit from this wave of spending.
4. Explore New Frontiers: Deglobalization doesn't mean ignoring Emerging Markets, but it does mean re-evaluating them. Countries like Mexico, Vietnam, India, and parts of Eastern Europe stand to benefit as manufacturing hubs shift. The key is to find markets that offer a mix of growth, stability, and strategic alignment with major economic blocs.

Deglobalization is more than a buzzword; it's a structural transformation of the world economy with multi-decade implications. The era of prioritizing cost above all else is giving way to an era that values resilience, security, and regional ties. For the patient investor, this messy and unpredictable transition will create significant opportunities. By focusing on resilient businesses, scrutinizing geopolitical risks, and understanding the flow of new capital, you can position your portfolio not just to survive this new world order, but to thrive in it.