Fragmentation of the global village

The globalisation trend is as strong as ever but there are some new dynamics that are forcing the global village to become increasingly fragmented, believes Virginie Maisonneuve, head of global and international equities at Schroder Investment Management. And these new factors need to be taken into account in the stock selection process.

While a strong belief in fundamentals drives the search for “quality growth companies, selling at reasonable price and having competitive advantage,” it is also key to look at the strong macro-economic themes. “The way we look at the world clearly is reflecting our investment philosophy,” states Ms Maisonneuve.

Some secular trends, which tend to have a long-term impact on the world’s economies and societies, such as the demographic evolution, the changing climate and the super cycle – which highlights the increasing role of the large emerging markets on the global economy – have been around for a few years.

However, a new theme is emerging as a result of the recent crisis, and as a consequence of globalisation. “We are seeing a fragmentation in the global village, in the globalisation trend, mostly around cultural and social issues,” notes Ms Maisonneuve.

In the Middle East, the political unrest is underlying ethnic, ancestral problems which are becoming much more dramatic in terms of their outcome. Cheap technology such as internet access is being used and it is creating new virtual communities. From an economic perspective, in Europe there is an increasing divide between core and peripheral economies. Social fragmentation is also increasing. The Gini coefficients – which measure the inequality of income distribution within a country – have risen dramatically, fuelled by the financial crisis.

“When we look at companies, we want to understand how they deal with these issues,” says Ms Maisonneuve.

The globalisation trend is in continuous evolution. A company that in the 1980s was underestimating China as the growth engine of the global economy, ignoring global supply chain changes and the role of the internet, would be probably bankrupt today.

Similarly, modern companies have to take into account these new factors to remain competitive. For example, a new element of evaluation of global companies is whether they employ local management in the Middle East or, rather, decide it is not a safe bet, in light of all the changes happening in this region. Part of the analysis on firms has to necessarily focus on whether they have exposure to Europe’s troubled economies. Those corporations which sell to Greece, Portugal and potentially Italy and Spain, may be negatively affected. It is, for example, important to estimate the impact of delayed payments or the time necessary for the management to deal with these new issues.

For instance, even a large pharmaceutical company like Roche, for which Greece represents a very small part of sales revenues, needs to look at the increase in accounts receivable coming from this country – where a lot of the drugs are sold through the government system – and the amount of time they need to spend to try to get this money back, she says.

“It’s also about understanding where companies are sourcing their labour and the cost of it,” says Ms Maisonneuve.

“This is a big subject and it is something that permeates through the qualitative assessment of the companies and mostly, their competitive side.”

Virginie Maisonneuve, Schroder Investment Management