BlackRock founder Larry Fink declared that the Russia-Ukraine war is bringing the era of globalization to an end, but investors should keep in mind that the global economy and the financial system can’t turn on a dime, analysts say.
“There is a lot of talk about countries going back to local production and the era of globalization and long overseas supply chains is over,” said Chris Rupkey, chief economist at FWDBONDS, in a note following Thursday’s U.S. data showing a fall in first-time jobless benefit claims to their lowest since 1968. “But that economic model has one gigantic stumbling block in the U.S.A. because there is no one to work the factories to produce the goods here on American soil.”
So what is Fink, one of the founders of the world’s largest investment management firm, Blackrock
with $10 trillion under management, talking about when he talks about the end of globalization?
In his annual investor letter released on Thursday, Fink said he remains a believer in the benefits of globalization: “Access to global capital enables companies to fund growth, countries to increase economic development, and more people to experience financial well-being. But the Russian invasion of Ukraine has put an end to the globalization we have experienced over the last three decades,” he wrote.
Sanctions imposed by the U.S., E.U. and allies have largely expelled Russia from the global financial system while numerous Western companies have left or suspended operations in the country as punishment for its invasion of Ukraine. The “economic war” shows what can be achieved when companies, supported by their stakeholders, unite in response to violence and aggression, Fink said.
“Russia’s aggression in Ukraine and its subsequent decoupling from the global economy is going to prompt companies and governments world-wide to re-evaluate their dependencies and reanalyze their manufacturing and assembly footprints —something that Covid had already spurred many to start doing,” Fink said.
Indeed, talk of such decoupling first gathered momentum as the administration of former U.S. President Donald fought a trade war with China, a trend Fink had highlighted in previous letters. If globalization is poised to unwind, some analysts say, it makes sense to look at homegrown investments, which for U.S. investors would include companies whose revenues come overwhelmingly from domestic sales and whose assets are primarily U.S.-based.
It also makes sense to expect more upward pressure on inflation as shorter supply chains raise costs.
Some expectations around deglobalization may not stand up to reality though.
After all, what happens if in a couple of years a firm’s competitor goes back to doing business with people around the world and can beat it on price? “Do you go back to the old model? It’s not an easy competitive point of view,” said Ed Keon, chief investment strategist at QMA, in a phone interview.
Competitive forces are likely to keep “at least a substantial degree of globalization going” despite near-term crosscurrents, he said.
In the short run, the simplest trade this year has been to look at areas that have seen underinvestment for years, including energy and other materials and infrastructure, he said.
“Until that is reversed or we have embraced noncarbon sources until they displace the need for carbon, it seems quite likely this commodity rally might have some legs,” Keon said, which speaks in favor of investing in commodities and commodity producers.
It’s been a wild ride for commodity markets since Russia’s Feb. 24 invasion of Ukraine, with oil benchmarks
soaring to around 14-year highs, retreating sharply, then pushing back to the upside this week. Both West Texas Intermediate crude, the U.S. benchmark, and Brent crude, the global benchmark, remain well above $100 a barrel. The energy stock sector, up 42.25% year to date, is the top gainer by far among the S&P 500 index’s 11 sectors.
U.S. stocks overall have stumbled to start 2022, but have bounced back from the lows. The S&P 500
rose 1.8% over the past week, while the Dow Jones Industrial Average
eked out a 0.1% rise and the Nasdaq Composite
advanced 2%. It was the second consecutive weekly gain for the major indexes.
Investors continued to shake off war-related jitters and took in stride signals from Federal Reserve officials, including Chairman Jerome Powell, who left open the door to boosting interest rates by more than 25 basis points, or a quarter percentage point, at future meetings.
The week ahead is expected to continue reflecting a tight U.S. jobs market, with ADP set to release its estimate of March private-sector job creation on Wednesday, while the Labor Department’s official jobs report for the month is due Friday.
Thursday will feature the release of the February reading of Fed’s favorite inflation indicator, the personal consumption expenditure price index. The core PCE price index rose 5.2% year over year in January for its fastest pace in 39 years.