Swiping a credit card or paying online is one consumer area that may be relatively immune to slowing globalization — or as Morgan Stanley puts it, “slowbalization.”
Given their exposure to domestic factors, importance to the banking system and tax collection, and compounding growth effects, Morgan Stanley equity analyst James E. Faucette is looking to names like Visa, Mastercard and PayPal to emerge as “national champions.”
As the world becomes increasingly nationalistic, trade wars with multiple countries drag on and global commerce backtracks, Faucette “expects that the payments sector will be an on-going net beneficiary because of the long-term secular shift to electronification and compounding efficiencies,” he said in a note to clients last week.
There are some headwinds though. Payments continue to shift online, meaning countries may have more of a national interest to protect them or build their own for activities like tax collections and economic data indicators. while countries may want have control over those networks, Faucette expects a “combination” where global networks from partner countries can benefit, too.
“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,” he said. “We expect some combination of domestically developed payments schemes and/or countries allowing global payments operators (i.e. Visa and Mastercard) access to their markets.”
Global payment companies like Visa and MasterCard already have a huge existing scale advantage, Faucette said —making them the logical low-cost alternative. And at the moment, China does not figure meaningfully into Morgan Stanley’s investment for the “MVP stocks” — MasterCard, Visa, and PayPal.
Shares of PayPal have jumped 4% in the past month, Visa is up 6%, while Mastercard is up 8.5%. The stocks are outperforming the S&P 500, which is down about 0.4% percent in the same time period.
Much of the headwinds and slow down in globalization have to do with the China and the U.S.’s ongoing stalemate on trade. After back and forth retaliatory tariffs and President Donald Trump blacklisting Chinese telecom giant Huawei, Beijing has threatened to cut off its rare earth mineral supply to the U.S., which is crucial to the tech supply chain. The U.S. Defense Department is now looking to slow American reliance on rare earth materials from China.
The tariff worries spread to countries with exposure to Mexico after the president threatened to slap 5% duties on all Mexican imports on June 10. The tariffs will gradually increase to 25% in October if Mexico does not stem illegal immigration across its northern border, the White House said.
Trump announced on Friday that the U.S. had suspended the planned tariffs against Mexico indefinitely after reaching a deal to step up immigration enforcement.
Winners in this “slowbalization” backdrop are China internet stocks like Alibaba and small to mid-cap U.S. internet stocks like Yelp, according to Morgan Stanley. Groups with the most headwinds, or so-called “slowbalizers,” are telecom, autos, semis, information technology 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 D Zezas said in a separate note to clients Wednesday.
