Globalization:

HAVE THE TIDES TURNED?

Kurt Umbarger, CFA Global Equity Portfolio Specialist, International Equity Division March 2017

For accredited investors only. Not for further distribution.

2

1600s 1700s 1900s 1800s

Evolution of Globalization

1600

East India

Company

1840─1870

Second Industrial

Revolution

Pre-WWI

The great 100 years of globalization

Technology (steam ships, railroads,

telegraph)

Economic theory (Adam Smith,

declining tariffs)

Gold standard (exch. rate stability)

1670

Hudson’s Bay

Trading Company

1760─1820

First Industrial

Revolution

1930

Smoot-Hawley

Tariff Act

1828

U.S.

Tariffs

Source: T. Rowe Price.

3

Image: By National Photo Company [Public domain], via Wikimedia Commons from Wikimedia Commons.

The Trumps of Their Day

4

Source: T. Rowe Price.

Smoot-Hawley Tariffs—Save the Worker!

Second-highest U.S. tariffs in 100 years

Productivity gains from electrification had resulted in a

significant increase in farmland capacity

Import tariffs introduced to protect American jobs, namely

farmers

World retaliated with higher tariffs, Canada imposed higher

tariffs on what amounted to 30% of U.S. exports and formed

a new trading alliance with Britain

Great Depression worsened and world trade collapsed

5 5

We Told You So!

0

1

2

3

4

5

6

1929 1930 1931 1932 1933

U.S

. $

Bil

lio

n

World Trade (in USD)

Source: League of Nations “World Economic Survey 1932-33” as of 31 December 2016.

WORLD TRADE 1929–1933, U.S. $BN

6

1940s 1970s 2000s 1990s

Evolution of Globalization

1944

Bretton Woods,

IMF, World Bank

1994

North American Free

Trade Agreement

(NAFTA)

2017

Regional

Comprehensive

Economic

Partnership?

Mercantilism

gives way to

Multilateralism

2017

Trans-Pacific

Trade Partnership?

1948

General Agreement

on Trade and Tariffs

(GATT)

1971

Bretton Woods

collapses

1995

World Trade

Organization (WTO)

Golden Era of

Globalization

Source: T. Rowe Price.

7

Source: World Bank as of 31 December 2016. © BCA Research 2017.

100 Years Later, Tariffs Have Declined

Dramatically

Russian Federation

Brazil (8.3%)

South Africa

World

China

Philippines

Australia

U.S.

UK

EU

Japan

New Zealand

Malaysia

Canada

0 1 2 3 4 5%

AVERAGE TARIFF RATE

20

10

CHINESE AVERAGE TARIFF RATE

30%

8

Source: World Bank as of 31 December 2016.

World Trade—Gross Domestic Product

0

10

20

30

40

50

60

70

Tra

de

as

% G

DP

WORLD

World

9 9

We Have Spent the Postwar Era Building a

More Connected World

Sources: The Conference Board Total Economy Database, UN Population Division, and McKinsey Global Institute analysis.

LINES SHOW TOTAL TRADE FLOWS BETWEEN REGIONS, BUBBLES SHOW

PARTICIPATION IN WORLD TRADE

USD $50–$100 billion USD $100–$500 billion USD $500 billion or more

1990

100% = $1.8 trillion USD

41% 12%

4%

2%

3%

8%

22%

2%

2013

100% = $17.2 trillion USD

32% 8%

6%

5% 2%

32%

7%

4%

5%

4%

10 10

Globalization, It’s Not Just Trade

It’s not just goods…

And it’s not just services…

It’s capital

And it’s people

11 11

We Tested Some Limits of the Globalization

of Capital

Sources: Oxford Economics and FactSet. As of 30 June 2016.

0

100,000

200,000

300,000

400,000

500,000

600,000

700,000

800,000

Va

lue

of

Iss

ua

nc

es

in

U

.S. $

Mil

lio

n

U.S. Asset-Backed Securities Issuance

12 12

Do We Have Enough Workers?

Source: Oxford Economics and FactSet. Working age is defined as 15 to 64 years old. As of 30 June 2016.

70

80

90

100

110

120

WORKING-AGE POPULATION, INDEXED TO 100

Euro Zone Japan BRIC ASEAN United States

13 13

Probably Not Without Immigration!

Source: U.S. Census Bureau, Population Division. As of December 2014.

0

200

400

600

800

1,000

1,200

1,400

2007-10 2010-15 2015-20 2020-25 2025-30 2030-35

Ch

an

ge

, T

ho

us

an

ds

, A

nn

ua

l A

ve

rag

e

FOREIGN-BORN TO DRIVE U.S. WORKING-AGE

POPULATION (16-64 YEARS OLD)

Foreign Born

Native Born

14

Source: Organization for Economic Co-operation and Development (OECD) 2010, “Perspectives on Global Development 2010: Shifting Wealth,” © OECD Publishing as of 31 December 2016.

Globalization Appears to Be Succeeding at the

Global Level…

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

Affluent Converging Struggling Poor

% C

ou

ntr

ies in

Each

C

las

sif

ica

tio

n

SHIFT IN GLOBAL WEALTH

1990s2000s

15

Sources: YouGov/The Economist, World Bank, and UN.

…But Sentiment Varies Nationally

ENOUGH TO GO AROUND?

Attitudes toward globalization change in GDP per person

16 16

All images sourced from Wiki Commons. See Additional Disclosures page for attributions.

Italy

Beppe Grillo

May 2018

United Kingdom

Theresa May

July 2016

Germany

Martin Schulz

September 2017

United States

Donald Trump

November 2016 Netherlands

Geert Wilders

March 2017

Philippines

Rodrigo Duterte

May 2016

Mexico

Andrés Manuel

López Obrador

July 2018

Populism on the Rise

France

Marine Le Pen

April 2017

Italy

Beppe Grillo

May 2018

United Kingdom

Theresa May

July 2016

Germany

Martin Schulz

September 2017

United States

Donald Trump

November 2016 Netherlands

Geert Wilders

March 2017

Philippines

Rodrigo Duterte

May 2016

Mexico

Andrés Manuel

López Obrador

July 2018

France

Marine Le Pen

April 2017

17

The Winds of U.S. Policy Have Shifted

Stalled Recovery (2012 to 2016)

Initial Post-GFC Rebound (2008 to 2011)

“Trumponomics” (2017 to ??)

Tailwinds Headwinds

Monetary

Policy

Fiscal

Policy

Regulation

Tax

Policy

Trade

Policy ??

18 18

Trump Sees a Trade Deficit as “Losing;”

Importers at Risk

Trade accounted for 30% of U.S. GDP in 2015 versus 18% in the 1980s

Average for other advanced economies was 70% in 2015

Manufactured goods account for 75% of U.S. imports, and oil imports

make up virtually all the rest

Most prominent imports are autos, data processing machinery, retail

goods, and pharmaceuticals

24% of manufacturing imports come from China, 20% from the EU, and

24% from Canada and Mexico combined

Border adjustability tax or no?

Source: World Bank; analysis by T. Rowe Price as of 31 December 2016.

19 19

Image: By Ralf Roletschek - Transferred from the German Wikipedia. Original file is here. (Original upload log available below.), GFDL,

https://commons.wikimedia.org/w/index.php?curid=35770, via Wikimedia Commons from Wikimedia Commons

We Can Put People Back to Work, but…

20 20

All images sourced from Wiki Commons. See Additional Disclosures page for attributions.

…There Are Bigger Forces at Work That Will

Drive Productivity and Globalization

INVESTMENT IMPLICATIONS

22 22

Global Region Market Summary

Source: T. Rowe Price.

Positives Negatives

United

States

Tax reform, deregulation, fiscal stimulus

Solid economy

Unemployment <5%

Protectionism

Elevated valuations

Rising interest rates and U.S. dollar

Europe ECB stimulus, weaker euro

Early-cycle economic expansion

Upside earnings potential

EU breakup risks

Brexit impact

Muted fiscal support

Japan Weaker yen

BOJ stimulus

Improving corporate governance

Sensitivity to global trade

Stalled wage growth

Demographic challenges

Emerging

Markets

Attractive equity valuations

Commodity price stabilization

Stronger economic growth

Rising U.S. dollar

Sensitivity to global trade

Subject to large capital swings

23 23

Global Sector Market Summary

Source: T. Rowe Price.

Positives Negatives

Consumer E-commerce

EM consumption

Protectionism

Fierce competition

Energy/Materials OPEC production cuts

Short-term price stability

U.S. shale supply coming

Strong U.S. dollar

Financials Rising interest rates

Deregulation

Weak credit demand

Negative interest rates

Technology/

Health Care Secular growth opportunities

Exciting new products

Protectionism

Price controls

Industrials Infrastructure initiatives

Quality, durable cyclicals

Expensive valuations

Infrastructure takes time

24 24

Overview and Summary

Globalization and nationalism have always been awkward dance

partners

Focus on policy adjustments and their impact

Near-term potential for faster global growth and higher interest rates

Significant risk of underwhelming policies relative to market

expectations

Renewed prospects for financials

Long-term secular and durable growers remain attractive

Source: T. Rowe Price.

25 25

Additional Disclosures

Philippines – Rodrigo Duterte

Image: By Presidential Communications Operations Office [Public domain], via Wikimedia Commons from Wikimedia Commons

UK – Theresa May

Image: By Andrew Burdett (Transferred from en.wikipedia to Commons.) [CC BY 3.0 (http://creativecommons.org/licenses/by/3.0)], via Wikimedia Commons from Wikimedia Commons

U.S. – Donald Trump

Image: By Gage Skidmore from Peoria, AZ, United States of America (Donald Trump) [CC BY-SA 2.0 (http://creativecommons.org/licenses/by-sa/2.0)], via Wikimedia Commons from

Wikimedia Commons

Netherlands – Geert Wilders

Image: By Wouter Engler (Own work) [CC BY-SA 4.0 (http://creativecommons.org/licenses/by-sa/4.0)], via Wikimedia Commons from Wikimedia Commons

France – Marine Le Pen

Image: By Marie-Lan Nguyen (Own work) [CC BY 3.0 (http://creativecommons.org/licenses/by/3.0)], via Wikimedia Commons from Wikimedia Commons

Germany – Martin Schulz

Image: Foto-AG Gymnasium Melle [CC BY-SA 3.0 (http://creativecommons.org/licenses/by-sa/3.0)], via Wikimedia Commons from Wikimedia Commons

Italy – Beppe Grillo

Image: By Lucarelli (Own work) [CC BY-SA 3.0 (http://creativecommons.org/licenses/by-sa/3.0) or GFDL (http://www.gnu.org/copyleft/fdl.html)], via Wikimedia Commons from Wikimedia

Commons

Mexico – Andrés Manuel López Obrador

Image: By Mexicanos Sin Fronteras (Ricardo Juarez y Andrés Manuel López Obrador) [CC BY 2.0 (http://creativecommons.org/licenses/by/2.0)], via Wikimedia Commons from Wikimedia

Commons

Self-Driving Car:

Image: By Dllu (Own work) [CC BY-SA 4.0 (http://creativecommons.org/licenses/by-sa/4.0)], via Wikimedia Commons from Wikimedia Commons

Parked Bus:

Image: By Intel Free Press (Bus wrapped with SAP Big Data parked outside IDF13) [CC BY-SA 2.0 (http://creativecommons.org/licenses/by-sa/2.0)], via Wikimedia Commons from

Wikimedia Commons

Drone Delivery:

Image: By Tim Cox PhotoGraphics, Inc (Flirtey) [CC BY-SA 3.0 (http://creativecommons.org/licenses/by-sa/3.0)], via Wikimedia Commons from Wikimedia Commons

Robotics:

Image: By Orange Indus (FANUC Robotics Deutschland) [CC BY 3.0 (http://creativecommons.org/licenses/by/3.0)], via Wikimedia Commons from Wikimedia Commons

26 26

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