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Globalization in the age of the coronavirus

29/12/2021

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Technology has been driving global trade and opportunities for investors
From Stockholm to Singapore, and places in between, I’ve come to see the rapidly growing global trade in services as part of the international opportunity set for investors. The tremendous expansion of the internet globally really drives this trend.
For example, inexpensive, high-quality telecoms make customer service centers available at any time of day, while online entertainment almost instantly spreads the latest music video or TV series instantly over computers or phone screens around the world.
More importantly, technology allows new ways to trade services. For example, technology is becoming more embedded in goods; think electronics that run everything from cameras to cars to kitchen appliances. This means that services such as research and development (R&D), engineering, sales, and marketing can increase sales across borders.
Trade is just as important as ever, but the composition of trade is changing.
Trade is still creating jobs, profits, and investment opportunities, but services trade is growing faster than goods trade. Investors who want to take advantage of this trend may need to be more selective and focus especially on the U.S. and, next, China, India, and increasingly Southeast Asia.
This geographical selectivity potentially oVers investors a strong advantage that investments in the rest of the world likely will struggle to match over the coming decade. What’s more, these geographic preferences align well with recent additions we made to our strategic allocations in U.S. Large Cap and Emerging Market equities.
Many of the S&P 500 Index sectors that we expect to outperform in a post-pandemic world, such as those focused on technological innovation already have some of the largest weights in the Index. Most notable are Information Technology, and Consumer Discretionary and Health Care. A more cyclically oriented sector, such as Industrials, also may benefit.


And there are other trends at work: The pandemic has resulted in what I to call “the Big Rethink”.
Broken supply chains, a realization that some overseas industrial supply chains are more strategically important and more vulnerable than we had thought, and the politics of pandemic are leading to a reassessment of 
goods trade across the globe. The U.S. and Europe have identiAed critical industries, for example, those providing basic health care supplies such as cotton swabs and personal protective gear that need to stay closer to home.
Moreover, as U.S.-China competition heats up the political rhetoric, China has prioritized national self-su\ciency for its technology and consumer goods needs. As a result, the share of global trade in manufacturing output has been shrinking and we are seeing a rise in local or regional production and trade networks.
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Weighing potential market threats from inFLation

29/12/2021

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Short-term investments were about the only game in town back then, beyond gold and other tangible, or physical assets. That put the spotlight on money market funds, capable of taking full advantage of then Fed Chairman Volcker’s efforts to break the back of inflation by raising short- term rates to unprecedented levels.
Volcker’s successful effort was the catalyst for a decades-long decline of inflation, or disinflation, propelled increasingly by fundamental changes to the economy. These changes ranged from diminished union power, deregulation, an aging population, and the migration to low-cost suppliers abroad under the banner of globalization. The resulting fall in interest rates accompanying those declines laid the groundwork for the golden era of bonds and stocks, by sending bond prices higher and allowing equities to accommodate higher valuations.
Disinflation’s climax came during the economy’s pandemic-induced free fall, serious enough to trigger declines in the CPI during the spring of 2020. Inflation is playing catch-up following its deep dive during the economy’s free fall last year. Increases already are emerging. Services inflation is rebounding from a 10-year low, propelled by increased airfares, hotel rates, entertainment costs and other frontline industries hit hardest by the pandemic. Goods, or merchandise, inflation is weighing in with outsized increases in used car prices and other sizable increases contributing to the largest one-month increase over 55 years. Increases in goods and services prices could be sustained by labor-market dislocations and by supply-chain disruptions created by a V-shaped recovery of global economic growth and world trade.

​What’s next for inflation?

These likely are temporary supports for re-inflation, begging the question of inflation’s outlook beyond increases extending into early 2022. Will inflation continue to rise beyond its pre-pandemic peak, reversing its decades-long decline? Our view is that inflation will face hurdles to sustaining a rate that’s expected to climb to a 13-year high in 2021. Here’s why:
By the early part of 2022, economic growth may well throttle back to a more sustainable rate easing demand pressures on capacity as the impact of the economic stimulus subsides.
The economy has shown an ability to grow more rapidly than its measured potential for sustained periods during 1996 – 2000 and again in 2018 – 2019 without a material acceleration of inflation, partly because of the fundamental restraints mentioned earlier. Those fundamental restraints on inflation, though eroding, still appear strong enough to keep a lid on in&ation, much as they have since the 1980s.

Potential pitfalls and opportunities for investors?
For investors, a moderate rise of in&ation does have its potential beneCts. The outlook for corporate proCts likely will improve if more rapid price increases are being propelled by economic growth strong enough to lift sales volumes and business pricing power. That same lift to corporate proCts can help support credit quality among corporate bond issuers.
Still, be mindful that even a modest rise in in&ation and interest rates can have an impact on certain types of securities that happen to be unusually sensitive to interest-rate changes. These securities may include longer- dated bonds and income-generating areas of the stock market such as dividend paying stocks and REITS that may not look as attractive if bond yields are in a sustained rise.
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AFTER THE STORM

29/12/2021

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Courtesy of V. WILLIS - WELLS FARGO Investment Institute
We think that a storm is a good analogy for COVID-19. It came through and shattered lives, jobs, and entire economies. And while we’re certainly not at the end of the pandemic, we seem to have reached the point where we expect things will gradually improve over the months ahead.

Thanks to many individuals’ hard work, e@ective vaccines are available and their distribution is ramping up. And, as is the case after a major storm, when we Onally put the pandemic behind us, we don’t believe the world will reset to where it was. We expect it will be somewhat di@erent.
It’s that changed landscape that we think investors need to prepare for now.
What will the new investing landscape look like?
At the Wells Fargo Investment Institute, we’ve been spending a lot of time thinking about the conOguration of the new landscape. Although we haven’t seen a pandemic on this scale for over a hundred years, we do think that we can learn from other similarly disruptive periods in our history.
As we’ve worked through di@erent scenarios, I was interested to see that several trends began to emerge that favor areas of focus for me early on in my career, among them commodities. Driving these trends is a drop in supply as weaker companies have gone out of business and cheap debt. Access to low-cost debt has allowed smaller companies to invest in new technologies, suggesting that they may emerge from the pandemic in a stronger position to compete.
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