Thirty-three years ago, one of the world’s most infamous borders was breached. The fall of the Berlin Wall ushered in an age of relative geopolitical calm that laid the foundations for the last great period of globalization—a time when borders dissolved, and goods, services, people, capital and ideas moved more freely around the world.
Recent events are hardening those borders once more, in ways that are changing the strategic and economic landscape. Twentieth century-style war between major states has returned, but against a context of 21st-century technology. The COVID-19 pandemic has not only crystalized the cross-border threat of contagious disease, but also the fragility of globalized health and pharmaceutical infrastructure. And political resistance to globalization, combined with a heightened sense of the vulnerability of globalized supply chains and a carve-up of markets along new geopolitical lines, is complicating the free flow of trade.
We believe investors can adapt to this new environment in three ways: seeking out some of the lesser-known companies playing a growing role in the 21st-century defense industry; investing in the therapeutics and other tools vital to securing national public health; and identifying the potential beneficiaries of on-shoring, near-shoring and “friend-shoring.”
Executive Summary
- An age of globalization is giving way to a period of hardening borders, raising security challenges, and opening up a multitrillion-dollar global security financing gap.
- We believe investors can adapt to this new environment, and invest in the potential solutions, starting in these three areas:
- In Security: The growing importance of sophisticated technology in military capabilities means not only more dependence on the commercial sector, but on specialists within the commercial sector that are often outside the traditional defense industry.
- In Healthcare: The COVID-19 pandemic underlined the neglected importance of diagnostic technologies, but also the over-reliance on global pharmaceutical supply chains.
- In Trade: Companies creating solutions that help to localize supply chains could stand to benefit from the momentum behind on-shoring, near-shoring and “friend-shoring.”
U.S. DEFENSE IS BECOMING A RESEARCH ENTERPRISE
U.S. Department of Defence, Investment Accounts, mix between procurement and research, development, test and evaluation, by fiscal year
Source: U.S. Department of Defence. Data as of July 2022. For illustrative purposes only.
