Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 430

Slowing global trade not the threat investors fear

Contributing authors: Jonathan Lemco, Asawari Sathe, Adam J. Schickling, Maximilian Wieland, and Beatrice Yeo, from the Vanguard Investment Strategy Group’s Global Economics Team.

The last 12-plus months have emphasised that the COVID-19 pandemic would accelerate trends already in place. One of these trends is the shortening, and in some cases the reshoring, of supply chains, as business leaders question whether their supply chains have been stretched too far and become too complex.

Such a trend raises a natural question: Is globalisation dead?

New Vanguard research, The deglobalisation myth(s), concludes that, no, globalisation isn’t dead. Instead, global trade growth is likely to slow, as it’s been doing since the GFC. This slowing in global trade growth, what we term ‘slowbalisation’, is unlikely to turn into a contraction in global trade. What’s more, the implications for investors are only modest.

A slowbalization scenario is the most likely outcome

Sources: Vanguard calculations, using data from the World Bank, the Organisation for Economic Co-operation and Development, and the KOF Swiss Economic Institute.

The allure of global trade is understandable

Companies that produce goods or provide services want the largest possible markets for their outputs. But a structural expansion in supply chains, which boosted gross trade in the 1990s and early 2000s, started to slow even before the GFC. A turn toward protectionism - government policies that favour domestic industries - over the last decade in the face of rising inequality in developed economies is likely to similarly tap the brakes on global trade.

We note that other aspects of globalisation, including international capital flows, knowledge sharing, and geopolitics, carry potentially significant economic, societal, and environmental consequences. Our latest research focuses on just one aspect of globalisation that addresses a specific concern of investors: the trade of goods and services.

The concern is that slowing global trade growth may reduce corporate earnings and profit growth and, by extension, weigh on equity prices. After all, a globalisation wave that began in the 1990s coincided with a six-fold increase in S&P500 Index earnings per share and more than a doubling of profit margins, contributing to almost 90% of the index’s price return over most of three decades.1

Risks to investors may not be as great as they seem

But we contest the view that globalisation has been the central factor in the expansion of these return drivers. Our research demonstrates an inconclusive or weak relationship between earnings growth and changes in trade dependency. And it shows that industries with the greatest increase in profit margins since 1990 - finance and insurance, and office and computer machinery are examples - have experienced only modest changes in trade dependency.

Trade tensions that precipitated sharp bouts of market volatility just a few years ago underscore the importance that investors ascribe to global commerce with few impediments. No doubt, geopolitical risks are ever present and worthy of attention. But our new research quantifies risks related specifically to a future of slowing global trade growth, and we believe that these risks to investors aren’t as large as they’re sometimes portrayed.

Rather, we emphasise conclusions shared by our new research and our December 2020 research A Tale of Two Decades for U.S. and Non-U.S. Equity: that corporate earnings growth hasn’t been a major contributor to U.S. equity outperformance in the past and that we shouldn’t expect it to have a meaningful impact on future outperformance or underperformance.

Valuations, or the price investors pay for earnings, represent the most important signal for future asset returns.


1 The average annual S&P 500 Index price return from 1990 to 2018 was 7.4%. Three factors make up this return: valuation expansion/contraction (dollar paid per dollar of earnings), earnings growth from revenue growth, and earnings growth from ratio of earnings to revenue (profit margins). Contributions from these factors were 0.8%, 3.7%, and 2.9%, respectively. 


Vanguard is a sponsor of Firstlinks. This article is for general information and does not consider the circumstances of any individual. For more articles and papers from Vanguard, please click here.



What’s the truth about stagflation?

Just how reliant on China are we?


Most viewed in recent weeks

Stop treating the family home as a retirement sacred cow

The way home ownership relates to retirement income is rated a 'D', as in Distortion, Decumulation and Denial. For many, their home is their largest asset but it's least likely to be used for retirement income.

Two strong themes and companies that will benefit

There are reasons to believe inflation will stay under control, and although we may see a slowing in the global economy, two companies should benefit from the themes of 'Stable Compounders' and 'Structural Winners'.

Welcome to Firstlinks Edition 433 with weekend update

There’s this story about a group of US Air Force generals in World War II who try to figure out ways to protect fighter bombers (and their crew) by examining the location of bullet holes on returning planes. Mapping the location of these holes, the generals quickly come to the conclusion that the areas with the most holes should be prioritised for additional armour.

  • 11 November 2021

Reducing the $5,300 upfront cost of financial advice

Many financial advisers have left the industry because it costs more to produce advice than is charged as an up-front fee. Advisers are valued by those who use them while the unadvised don’t see the need to pay.

Welcome to Firstlinks Edition 431 with weekend update

House prices have risen at the fastest pace for 33 years, but what actually happened in 1988, and why is 2021 different? Here's a clue: the stockmarket crashed 50% between September and November 1987. Looking ahead, where did house prices head in the following years, 1989 to 1991?

  • 28 October 2021

Why has Australia slipped down the global super ranks?

Australia appears to be slipping from the pantheon of global superstar pension systems, with a recent report placing us sixth. A review of an earlier report, which had Australia in bronze position, points to some reasons why, and what might need to happen to regain our former glory.

Latest Updates

Investment strategies

Are these the four most-costly words in investing?

A surprisingly high percentage of respondents believe 'This Time is Different'. They may be in for a tough time if history repeats as we have seen plenty of asset bubbles before. Do we have new rules for investing?

Investment strategies

100 tips from our readers for new investors

From the hundreds of survey responses, here is a selection of 100 tips, with others to come next week. There are consistent and new themes based on decades of experience making mistakes and enjoying successes.


What should the next generation's Australia look like?

An unwanted fiscal drain will fall on generations of Australians who have seen their incomes and wealth stagnate, having missed the property boom and entered the workforce during a period of flatlining real wages.


Bank results scorecard and the gold star awards

The forecasts were wrong. In COVID, banks were expected to face falling house prices, high unemployment and a lending downturn. In the recovery, which banks are awarded gold stars based on the better performance?

Exchange traded products

In the beginning, there were LICs. Where are they now?

While the competing structure, ETFs, has increased in size far quicker in recent years, LICs remain an important part of the listed trust sector. There are differences between Traditional and Trading LICs.


Should you bank on the Westpac buy-back?

Westpac has sent out details of its buy-back and readers have asked for an explanation. It is not beneficial for all investors and whether this one works for some depends on where the bank sets the final price.

Investment strategies

Understanding the benefits of rebalancing

Whether they know it or not, most investors use of version of a Strategic Asset Allocation (SAA) to create an efficient portfolio mix of different asset classes, but the benefits of rebalancing are often overlooked.


Six stocks positioned well for a solid but volatile recovery

The rotation to economic recovery favouring value stocks continues but risks loom on the horizon. What lessons can be drawn from reporting season and what are the trends as inflation appears in parts of business?



© 2021 Morningstar, Inc. All rights reserved.

The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. Any general advice or ‘regulated financial advice’ under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.

Website Development by Master Publisher.