Russia-Ukraine invasion could be the spark to ignite a 'realignment of alliances and a restructuring of global trade'
Investors have had to deal with a steady stream of 'new normals' during the last two years. At every turn, there are new shifts, new uncertainties, and new unknowns to grapple with. While some of these changes may or may not be temporary, others are indicative of longer-term patterns.
According to a new commentary from Algonquin Capital, de-globalization is one example of a paradigm shift.
“What started with Trump’s ‘America First’ policy and was accelerated by pandemic disrupted supply chains, has now taken on a new life with the Russian invasion of Ukraine,” the commentary said. “Not only has the trend gained momentum, but it now also has much broader implications.”
The Russian invasion of Ukraine has resulted in the construction of a new wall, but not along the US-Mexico border. In a nod to past comments from JPMorgan’s CEO Jamie Dimon, Algonquin Capital said the conflict might result in a "realignment of alliances and a restructure of global trade," in which governments and firms "cannot rely on countries with differing geopolitical interests for key goods and services."
Simply put, national security and supply chain robustness will take precedence above the lowest manufacturing cost. In retrospect, the blog post argued, Germany's decision to phase out its nuclear reactors and rely on Russia for 70% of its natural gas. The country is now trying to locate new sources in order to avoid having to limit its supply of energy.
Democratic governments all throughout the world will certainly reconsider their reliance after February 24th, 2022.
Another example is Taiwan, which also has a two-thirds share of the world's semiconductor foundries. Given China's interest in Taiwan, continuing with the status quo seems unreasonable. In light of this, Intel has already announced plans to invest $40 billion in Arizona and Germany to build plants, and other companies might follow suit.
Globalization, in combination with technology and demographics, has pushed inflation lower in recent decades, leading to fears of deflation. As the trend of globalization is set to reverse, central bankers will be more preoccupied with a more modest shift in long-term price appreciation price appreciation, rather than a return to 1970s-style inflation, as automation and technology continue to put downward pressure on pricing.
To keep CPI in the 2-2.5% range, central banks may need to keep overnight rates higher rather than slightly undershooting the 2% target, Algonquin Capital estimates.
“The world is in flux, and with so many factors to consider there is still much uncertainty on how this all plays out,” the commentary said. “But it does seem obvious that one of the factors containing inflation, globalization, has reversed course.”