We’ve written in the past about how the way deglobalization is creating a new opportunity set. Trade policy changes will drive a rearranging in company supply chains. In general the latest wave of trade policies encourage more regional supply chains. Additionally, they encourage companies to diversify suppliers across markets. Covid-19 will accelerate these changes. Investors will need to analyze the patchwork of regional agreements that emerge impacts business values.
A recent article from AlphaWeek looks at how deglobalization impacts geography based investing and the manager selection process. It includes some interesting commentary on categorization and country selection as well.
First of all, there isn’t even a universal approach to defining geography in the investing process.
Institutional Investors have a penchant for categorization and a seeming dislike of standardization. It is not unusual for alternatives investors in particular to use asset, strategy, vehicle-type or liquidity to bucket investments and assign staff responsibility. Geography is one of the key lenses that investors use, but its also not standardized. In most cases it is s the region where the invested assets sit, but in some instances is the manager domicile(which may give a differentiated approach.)
These categories are of course, often blurred because a lot of companies can be listed in one country and receive most of their revenue from others. For example, NASPERS is listed in South Africa, but is hardly dependent on South Africa. This is why a bottom up approach can often yield great results in out of favor countries. However, allocotars need to see the big picture which makes top down analysis necessary. This top down analysis needs to be logical and empirical. A top down approach that worked in the globalized world will make less sense in a deglobalizaiing world. The stakes are probably highest for allocators with exposure to alternative investments.
In the alternatives word, particularly in hedge funds and private equity, those that were quick to identify more favorable risk/reward from a global palette have been able to outperform peers in returns and in turn to increase AUm without diminishing performance.
The article examines the impacts on China, Japan, Europe, and the US along with the emerging markets. In particular I want to highlight its view on emerging markets ex-Asia, and the broader implications for manager selection.
EM investors have long been cognizant of the importance of country and region selection for risk assessment. This top down approach to geography in a de-globalizing world may play a more important role across the investment spectrum, including in leading economies. The careful analyses of impacts to each region has its roots in macroeconomics burt really rests on an ability to pick those regions where the action is likely to be for extended period, thus creating better risk adjusted opportunities.
On manager selection in the deglobalized world:
Once the geography has been chosen, it is imperative to find the manager with the highest probability of extracting alpha from the opportunity set. This involves all the normal top-down and bottom up manager selection, but with the added burden of assessing regional expertise, cultural biases, and jurisdictional issues.
Click here to access the full article.