The current disruption of international supply chains is likely to transform global trade. Contrary to what some may think, we believe that Africa will profit from this trend. There is one simple reason for this.
Capital News Africa: From the Trading Floor – Week 33-2022
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The current trend toward de-globalisation could, according to a new study by US investment bank Goldman Sachs, have profound implications for the world economy. “Supply disruptions are beginning to encourage companies to source materials locally when possible,” says Maria Vassalou, co-chief investment officer of Multi-Asset Solutions at Goldman Sachs in the study.
Should de-globalisation become the norm, that would represent a clean break from what has transpired for more than three decades. After the fall of the “iron curtain” in 1989, globalisation was the dominant trend, providing for low interest rates, stable prices and relatively strong economic growth.
Western companies that built supply chains across the globe and manufactured their goods in low-wage countries were among the winners of this trend. Emerging countries also benefited from globalisation, as they were often host to the new manufacturing facilities. This is particularly true of China, which has gone from being a low-wage country to a high-tech one.
Today, however, the perception in the west has changed. Not only has the Covid-19 pandemic severely disrupted supply chains, the west has begun to regard the rise of emerging countries like China as a serious threat. “The US and Europe have in recent years have sought to restrict foreign investments, particularly from China, that target the acquisition of technology companies deemed important to national security”, notes Vassalou in the study.
Indeed, the west’s change-of-attitude of emerging markets could have negative implications for the latter’s capital markets. For this column, we don’t want to discuss whether this new attitude is justified. But we can say that, fortunately, it does not extend to Africa’s capital markets.
There are two reasons for this: First, Africa has not profited as much from the more than 30 years of globalisation. Apart from Morocco, Tunisia and Egypt, few other African countries have benefited from the internationalisation of supply chains. This is mostly due to the many bottlenecks in African countries that keep productivity low. For a long time, such low productivity was a major drawback for the African economy, prohibiting it from realising its full potential. Today, though, it can be seen as an advantage, as Africa does not face a decline in growth or a restructuring of its economy.
The second reason for why African capital markets should flourish is more decisive in our view, because it points to the future: Although Africa has profited less from globalisation than say eastern Asia, many things about its economy have improved. For example, the build-up of vital infrastructure is going well, even if we feel that it could be done even quicker. This means that Africa is poised to benefit from the regionalisation of the world economy - which is just another way of saying de-globalisation.
This, in turn, should boost African companies, especially those in sectors like financial, food processing and consumer goods. Indeed, these are the sectors that, in our view, investors in African stocks should be paying particular attention to.
Stated another way: Investors in Africa should be less concerned with themes like “international interdependence” and instead bet on the economic growth that Africa itself can generate.
In the Goldman study, Vassalou named four other big trends of late. They are: digitalisation, decarbonisation, destabilisation of the geopolitical order and the demographic shift. We believe that with respect to these four trends, Africa is making huge progress. And we are convinced that the continent will emerge stronger from the upheaval currently affecting the world economy.