Schroders

“The 3D Reset” refers to the three “Ds” of decarbonisation, demographics and deglobalisation. We believe these ongoing trends have had and will continue to have massive long-term implications for the global economy. Taken together, the 3Ds are reshaping the investment landscape. 

Understanding the three Ds - how they affect the global economy, what that means for market volatility, and how active investors should be allocating their assets - might be the key to deciphering what comes next and where the opportunities are.

• Deglobalisation: The Covid-19 pandemic and rising geopolitical tensions have heralded a new era where greater supply chain resilience and security is a priority. These winds have and may continue to encourage greater nearshoring of key sectors, such as manufacturing, which in turn could have implications across a wide range of sectors and asset classes.
• Decarbonisation: As countries around the world accelerate their response to climate change, we are in the midst of a transition from an overwhelming reliance on fossil fuels to greener energy sources. This energy transition will be expensive and drive inflationary tendencies, particularly given the amount of investment needed to bring innovation to scale.
• Demographics: Changing demographics - specifically a predicted slowing of global population growth - will have a huge impact on inflation and economic growth as employers face pressure to compete for a tighter talent pool and maximise the efficiency of its existing workforce. Companies will also look to invest in productivity-boosting technology to protect profit margins, likely hastening the more widespread adoption of robotics and artificial intelligence (AI).

How are the 3Ds of decarbonisation, deglobalisation and demographics causing risks and opportunities?

Demographics among drivers of India’s inexorable rise

India is the counterpoint to China. Having been outstripped by China over the past 40 years, maybe it is now India’s turn in the sun.

India is coming off a low base. Urbanisation is low and represents a significant medium-term productivity opportunity. Returns from infrastructure investment are high. Demographics are supportive, and labour is abundant and cheap. Government policies to improve fiscal efficiency, increase infrastructure investment, reduce friction for trade between Indian states, and drive import substitution have improved the prospects for growth. Meanwhile, digitisation and smartphone penetration creates the opportunity to improve economic formalisation and improve financial intermediation, education and price discovery.

However, caveats are required: issues of infrastructure, bureaucracy, protectionism, labour skills and labour code persist and despite its scale India is not necessarily the first choice for export manufacturing foreign direct investment (FDI). But India’s prospects for the next decade look promising.

Decarbonisation and deglobalisation beneficiaries

South Korea and Taiwan are markets exposed to trade and in particular technology. We have a positive structural view on technology as the world becomes increasingly digitised. 70% of the benchmark in Taiwan is technology, while in South Korea it accounts for 50%, as at October 2023. Meanwhile, South Korea also has strong battery companies with excellent long-term growth prospects from decarbonisation.

Other countries in the emerging markets (EMs) are beneficiaries of supply chain diversification. While India might not yet be a first-choice destination for export manufacturing FDI, a mix of infrastructure, skilled labour and geographic proximity supports the prospects for Mexico, Central Europe, and ASEAN. Manufacturing in developed markets can be very expensive both to build and operate, for example reshoring chip and battery production to the US requires enormous fiscal support. Hence deglobalisation is likely to be more about near-shoring and friend-shoring than it is about reshoring. It is also more about de-risking supply chains.

The impact of commodities in EMs has diminished markedly. But the investment requirements of the energy transition will strongly support certain commodities to the benefit of some markets, primarily in Latin America.

Finally, even though the Middle East will face challenges from the energy transition due its economic dependence on oil production, interesting opportunities derive from a strong government focus on economic diversification, with significant fiscal support and reform in Saudi Arabia and the UAE.

All in all, in 2024 uncertainties will persist and equity markets are likely to remain volatile. As always, however, the old adage that “there is always a bull market somewhere” may prove accurate. In fact, we think there are a number of areas that may prove highly profitable for global equity investors in 2024.

_{Source : THE 3D RESET: The world’s disruptive return to the old normal (https://www.schroders.com/en-hk/hk/individual/3d-reset/)
Source : Outlook 2024: Equities in the age of the 3D Reset (https://www.schroders.com/en-hk/hk/individual/insights/outlook-2024-equities-in-the-age-of-the-3d-reset/)}

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