Part II of the series shows that deglobalization implies a regime change, with trend increases in capex and the labor share, as well as a higher cost of capital, lower potential growth and greater government involvement in the economy. This constitutes a secular headwind for margins and free cash flow (FCF), especially for tech and manufacturing • We are not returning to the low inflation, zero real interest rate 2010s. Further, with the end of the “Great Moderation,” we expect higher macro volatility (of GDP, inflation, interest rates and FX). • With companies facing a higher weighted average cost of capital (WACC), we expect lower average multiples. This will prove especially challenging for longer duration assets, such as venture capital and speculative tech companies that are years away from generating FCF on a sustainable basis.
Deglobalisation will affect stock valuations. There are many interrelated dynamics at play that represent a powerful reaction on geo-political realities.
Deglobalisation Has Many Interrelated Dynamics
Deglobalisation is here and is not going away soon. It represents a powerful reaction on geo-political realities, climate-related imperatives, and global macroeconomic regime change. But it is not just shaking up corporate broad rooms and forcing the C-suite to rethink strategy. It is also forcing investors to adjust their models for lower stock value expectations.
Investors' focus today is finding investment managers that are able to identify the corporate winners and losers from deglobalisation. But that requires managers with a deep understanding of how the corporate world will look in 2030 and beyond.
Deglobalisation has many interrelated dynamics that will affect stock valuations:
- Western governments are introducing incentives, regulation and new demand that encourages firms to embrace domestic production (e.g. The Inflation Reduction act, the Chips Act, and increased defence spending in the US).
- With the end of the four decade trend towards free money, CFO's are now faced with a higher and rising cost of capital. This will heighten capital allocation decision vigilance and ROI hurdles.
- As reshoring takes hold, margins may come under pressure, driven by higher domestic wage and input costs.
- At one extreme, domestic manufacturing may see a renaissance. And at the other extreme, new tech start-ups may need to deliver profitability before securing funding.
- East-West trade agreements may come under pressure as governments compensate for a deglobalised demand curve for their products, which in turn could alter both import tariffs and domestic subsidies.
It will take time before the new deglobalised equilibrium has been found. For now, investors are mapping out the possibilities, how to manage the risks, and how to maximise returns under a deglobalised configuration.
What Are Mid-Cap Stocks & Why Are They Worth Considering Now?
Useful Unique Properties
Out of U.S. Growth Stocks and into What?
Risk-Off Equity Investing
Have Bond Yields Peaked and Growth Stocks Bottomed?
Long Duration Equity Growth Pricing