CONTRIBUTORS
Nicholas Hardingham, CFA
Portfolio Manager, Franklin Templeton Fixed Income
Stephanie Ouwendijk, CFA
Portfolio Manager, Research Analyst, Franklin Templeton Fixed Income
Robert Nelson, CFA
Portfolio Manager, Research Analyst, Franklin Templeton Fixed Income
Joanna Woods, CFA
Portfolio Manager, Research Analyst, Franklin Templeton Fixed Income
Sterling Horne, Ph.D
Research Analyst,
Franklin Templeton Fixed Income
Carlos Ortiz
Research Analyst, Franklin Templeton Fixed Income
Jamie Altmann
Research Analyst, Franklin Templeton Fixed Income
Samantha Higgins
Analyst,
Franklin Templeton Fixed Income
Preview
Investors are increasingly concerned about deglobalisation as a variety of geopolitical, economic and technological changes disrupt decades of growing global integration. The notion that global trade is becoming less interconnected could have serious implications for financial markets, with emerging markets (EMs) potentially becoming vulnerable.
Major drivers contributing to deglobalisation include economic nationalism and populism. Populist leaders often blame globalisation for economic difficulties, leading to a shift in focus toward protecting domestic industries, jobs and capital rather than pursuing international cooperation, as recent US policy shifts demonstrate. Economic nationalism connects with anti-immigration measures and cultural protectionism, exemplified by events like Brexit, which in some cases can result in a nation disengaging from global markets. Moreover, it appears escalating geopolitical tensions and national security concerns have accelerated this move away from global interconnectedness. Conflicts such as the Russia-Ukraine War and the US-China trade dispute have each disrupted supply chains in distinct ways, while the weaponisation of global institutions, such as the Society for Worldwide Interbank Financial Telecommunications (SWIFT), has introduced a new vector of vulnerability for sovereign fixed income markets that had historically depended on global market interlinkages. This has in turn been a catalyst for an evaluation of the traditional global market architecture. Additionally, the COVID-19 pandemic has prompted a fundamental re-evaluation of global interdependence, particularly in critical sectors such as semiconductors.
In this paper, we assess whether deglobalisation is indeed occurring and evaluate the potential risks deglobalisation poses to EMs.
Our conclusion
While concerns around deglobalisation have grown among investors, there is little evidence to suggest that the world is becoming fundamentally less interconnected. Although globalisation has plateaued over the past two decades, recent policy shifts and rising geopolitical tensions could still carry significant implications for financial markets. Despite these risks, we believe EMs are well-positioned to remain resilient—and may even emerge stronger.
EMs continue to enjoy a meaningful cost advantage over DMs, where rising labour expenses are increasingly unsustainable. Recent US tariff changes could trigger a reordering of supply chains in favour of more cost-efficient EM economies. Moreover, EMs’ growing specialisation and ability to achieve economies of scale are likely to support continued trade resilience as the relocation of production away from EMs remains costly and complex.
As global integration has slowed, many EMs have deepened regional economic ties—driven by a rising middle class and favourable demographics—leading to more robust intra-regional integration. We believe this trend is likely to continue, particularly as regional trade flows remain largely unaffected by DM policies. EMs have also become less dependent on global capital flows, thanks to the development of deeper, more stable local bond markets. These improvements in domestic financial systems have enhanced their resilience to external shocks.
However, for EMs to fully realise their potential, we believe supportive policies that facilitate trade will be essential. Infrastructure remains a key constraint in many regions, and further investment in logistics, transport and connectivity will be critical to unlocking additional growth. As a result, some countries may be better positioned to benefit than others. Overall, we believe concerns about deglobalisation having adverse effects on EMs appear overstated.
WHAT ARE THE RISKS?
All investments involve risks, including possible loss of principal.
Fixed income securities involve interest rate, credit, inflation and reinvestment risks, and possible loss of principal. As interest rates rise, the value of fixed income securities falls.
International investments are subject to special risks, including currency fluctuations and social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets. Investments in companies in a specific country or region may experience greater volatility than those that are more broadly diversified geographically.
The government’s participation in the economy is still high and, therefore, investments in China will be subject to larger regulatory risk levels compared to many other countries.
The allocation of assets among different strategies, asset classes and investments may not prove beneficial or produce the desired results.
Sovereign debt securities are subject to various risks in addition to those relating to debt securities and foreign securities generally, including, but not limited to, the risk that a governmental entity may be unwilling or unable to pay interest and repay principal on its sovereign debt.
WF: 6745209
