- Analysts at Macquarie say recent political development such as Trump’s election victory mark the end of an era for global trade.
- They said the current period may be as good as it gets for investor returns.
- To offset the effects of protectionism, companies may turn technology to cut costs, but competition is likely to become even more fierce.
Increased trade barriers, combined with rapid technological change, means competition among global corporations will become even more cut-throat, Macquarie’s global wealth management division says.
As a result, companies may now be delivering “one of the highest returns that investors are likely to see in the future”.
Analysts from the bank’s wealth management division said China’s inclusion in the World Trade Organisation in 2001 may have been the high-water mark for global trade.
Since then it’s been in decline, and “the elections or coups in the 2015-2018 period marked the end of the liberal order that started in the late 1970’s-early 1980’s”.
Donald Trump’s US election victory has ushered in a new era of global trade defined by protectionist rhetoric.
The US is currently embroiled in multiple trade skirmishes, led by a tit-for-tat escalation with China — the world’s second-biggest economy.
As it turns out, US companies have done pretty well out of China’s integration into the global economy.
“Over thirty years, global corporates have perfected their strategies of arbitraging differences in the global labour, product and capital markets,” Macquarie said.
And US corporates have led the way, boosting cash flow by shipping operations and labour out to emerging markets (mainly China).
The strategy has generated record profits and out-sized investment returns.
It’s also been the catalyst for rising inequality, as wages stopped growing in line with productivity while US companies scooped up a bigger share of gross national income:
Gross national income is calculated as GDP plus income earned from residents abroad, less domestic income earned by non-residents.
“Many decades ago, Warren Buffett argued that corporate profits should not be consistently above 6%7% of GNI; well it has been way above that level for almost two decades,” the analysts noted.
And it’s not just the US — here’s how the pre-tax profit share of Australian companies has steadily risen:
In view of dynamic the outlined above, the analysts highlighted a problem with Donald Trump’s approach — he wants asset rich, domestically focused companies, but also high equity valuations.
“Alas, these two demands are quite often incompatible,” Macquarie said.
The analysts said that global companies are likely to turn to technology in response to higher trade barriers, in an effort to cut costs and reduce payrolls.
However, technology can also be a “double edged sword”.
“On the one hand, it opens greater opportunities to streamline costs, but it also sponsors aggressive competition that in the absence of rapid technological evolution would have been unthinkable,” Macquarie said.
The net effect is that the combined forces of de-globalisation and technology could serve to significantly erode future returns.
And in that environment, competition will only get more intense.
“Winners would get stronger and weaker corporates and industries would continue to weaken, eventually being absorbed into various other entities,” Macquarie said.
Company life spans will get shorter, with the market leaders of today more likely to be replaced by new entrants. “Even Amazon eventually would gravitate to zero,” Macquarie said.
“As a result, we believe that the degree of market concentration would continue to increase, and returns would become far more divergent.”
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