Globalization is slowing down and, according to Morgan Stanley, there are a few stocks that can help investors profit on the trend.
According to Morgan Stanley equity analyst James E. Faucette, names like Visa (NYSE: V), Mastercard (NYSE: MA), and PayPal (NASDAQ: PYPL) will emerge as “national champions” due to their exposure to domestic factors, importance to banking and tax collection, and their compounding growth effects.
As countries around the globe become more nationalistic, and trade wars between the U.S. and multiple countries rage on impacting global growth, the analyst “expects that the payments sector will be an on-going net beneficiary because of the long-term secular shift to electrification and compounding efficiencies,” Faucette wrote in a note to clients.
Faucette notes that payments are increasingly moving online, and countries may begin to have an interest in building their own national platforms for things like tax collections and economic data indicators, though he expects that there will be a “combination” of global networks from partner countries.
“Most countries view the payments system as a logical extension of the banking system, which many consider to be an integral part of national sovereignty,” Faucette wrote. “We expect some combination of domestically developed payments schemes and/or countries allowing global payments operations (i.e. Visa and Mastercard) access to their markets.”
According to Faucette, global payments companies like Visa and Mastercard already have a massive existing scale advantage, which makes them the logical low-cost alternative. Right now, China doesn’t yet figure meaningfully into Morgan Stanley’s investment theses for its “MVP stocks,” Mastercard, PayPal, and Visa.
Mastercard is up 3% for the week and nearly 40% year-to-date, PayPal is up 3.37% for the week and 36% so far this year, and Visa is up 3.75% for the week and 30% for the year. All three stocks are far outperforming the S&P 500.
Much of the slow in globalization has been sparked by the ongoing stalemate between the U.S. and China in its trade negotiations, though there are other geopolitical developments that are triggering the change, including Brexit, challenges to multilateral trade pacts, the U.S. government’s moves in addition to tariffs—such as its blacklisting of Chinese telecom giant, Huawei Technologies—and the expanding authority of the Committee on Foreign Investment in the United States.
The bank also notes that there are several “pre-existing trends,” like the lessened importance of lower wages in supply chain location decisions and trade in services growing faster than trade in goods, that are also slowing globalization.
Last month, Morgan Stanley said in a note that they divide equity sectors into two groups: those facing significant headwinds, which they call “slowbalizers,” and those with upside, called “emerging regional champions.”
Besides the “national champions” of Mastercard, PayPal, and Visa, other possible “regional champions” are Chinese internet stocks like Alibaba (NYSE: BABA), and small to mid-cap U.S. internet stocks like Yelp (NYSE: YELP), according to Morgan Stanley. This group “work with technologies and products that are sensitive to the economic and/or national security interest of their home country,” but don’t rely on access to foreign markets of a geopolitical rival.
Morgan Stanley also said that companies up against the most headwinds, or so-called “slowbalizers,” are telecoms, autos, semis, information technology, Asian tech and large U.S. tech stocks.
“For industries where the products and production processes are not critical to national or economic security, and their production is not benefited by an overseas supply chain, we think few changes will result from ‘Slowbalization,’” Morgan Stanley analyst Michael Zezas wrote in a separate note to clients.