Megatrends - Local is the new global - April 2023

Companies exposed to the Local is the New Global megatrend, or the relocation of production activities, have an unfavourable cyclical bias during an economic downturn. Despite this headwind, most companies were able to outperform the MSCI World as the trend accelerated in 2022. Problems with supplies from China due to the lockdowns, geopolitical risks in certain production regions, and many states’ strategic desire to repatriate strategic output to their territory, as with semiconductors and pharmaceutical products, have resulted in an increase in industrial investments in the West. On this last point, a risk of protectionism is clearly emerging, as illustrated by Europe’s complaints about the American law granting tax credits to American households buying electric vehicles, but only those made in the USA. This reinforces the need for local sourcing in order to benefit from the US subsidy. Europe is considering doing the same. In addition, Germany’s 100-billion-euro military budget includes many research and production projects, mostly by German companies.

At the end of this year, two other phenomena are emerging: 1) the relocation of production to “friendly” countries, or “friend-shoring”, for example for American companies to India or Vietnam at China’s expense; and 2) in some sectors, programmes to accelerate automation in order to offset significant wage pressures, especially in low-wage sectors.

These new trends reinforce the relocation megatrend, which is expected to continue into 2023 and beyond. We do not expect the recession to be a major drag, and its effects may even be reduced by major countries’ national programmes.