Two prominent figures on Wall Street have recently said that the era of globalization is over. In this article, I will discuss what this means for investors in the months ahead and how you should adjust your investment strategy.
BlackRock CEO Larry Fink Says Globalization Is Over
BlackRock Inc. (BLK) founder Larry Fink has said that the Russia-Ukraine war is bringing the era of globalization to an end.
In his latest letter to shareholders, the asset management giant’s co-founder and CEO wrote that Russia’s invasion has broken the cross-border bonds between countries, companies and people that were already strained by the pandemic:
“Russia’s aggression in Ukraine and its subsequent decoupling from the global economy is going to prompt companies and governments worldwide to re-evaluate their dependencies and re-analyze their manufacturing and assembly footprints – something that Covid had already spurred many to start doing.”
Fink, whose firm oversees nearly $ 10 trillion in assets under management, added:
“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”.
Oaktree Capital’s Howard Marks echoed those fears, telling investors:
The recognition of these negative aspects of globalization has now caused the pendulum to swing back to local sourcing. Rather than the cheapest, easiest and greenest sources, there’ll probably be more of a premium put on the safest and surest.
For investors, they now need to consider what the “safest and surest” looks like and invest ahead of that premium.
The US Domestic Market Advantage
Although investors are suffering from a pendulum swing, which has turned from extreme greed to extreme fear, the US market will have advantages in the years ahead.
First of all, the US is geographically dislocated from the current Ukraine and Russia conflict. Any escalation could see the likes of the UK and Europe joining a NATO push, and investors would likely flee European stocks with countries in close proximity to Russia. Europe is also dealing with its reliance on Russian energy, with Russia threatening to cut off the taps to Finland in ‘retaliation’ for the Scandinavian country’s desire to join Nato.
The second aspect of that is that the harsh sanctions imposed on Russian oligarchs cuts off funding to the property markets of Europe and its high-end hospitality sector. Worse still, foreign investors from other nations will resist investing in countries that have willingly seized properties and assets of investors who are independent of any war movement, but also those close to the hostilities.
If globalization is over, then it would now make sense to consider domestic companies who make their revenues largely from domestic sales and US-based assets. It would also be wise to invest in anticipation of further inflationary pressures whilst supply chains adjust to the current tensions.
For domestic companies, we could see swathes of capital retreating from emerging markets to provide investment capital for home-grown businesses.
Central Banks Are Slamming On The Brakes
The next issue is that the Federal Reserve has now telegraphed tighter monetary policy, and central banks around the globe have been given a green light to follow.
One of the biggest props to the market rally over the last few years is now in the process of being removed. We will also likely see an end to the era of aggressive stock buybacks.
Investors now have to look at companies in a different light, and it will be true that cash is king. Junk bond funding strategies and bloated debt on balance sheets will no longer be risk-free, and it is important to find companies with strong sales and cashflow that are largely immune to the current global turmoil.
We also have to consider the input side of inflation and the latest US inflation Producer Price Index, which measures the prices paid by wholesalers for their goods, found that prices grew by 11% on the year.
This price spike was driven by a spike in demand for final demand goods like diesel fuel and motor vehicles. Asset-light businesses that are immune to vehicle and fuel costs are another check box for the months ahead.
On the funding issue, it would also favor companies that already have funding secured to fulfill their growth plans over the next 1-2 year horizon.
For years, the market and the global economy have advanced in large part due to “trickle-down economics,” which was more like flood-down economics. We now have to consider a world where central banks are shutting off the taps and businesses react from a viewpoint of fear and lack.
Hostilities Will Likely Strangle Global Expansion Plans
Larry Fink commented on the corporate response to the Ukraine war and said that the “economic war” showed what can be achieved when companies, supported by their stakeholders, unite in response to violence and aggression.
The reality is that investors should now catch up to the idea that a business model whose growth valuations are built on a growing international footprint are now at risk.
I noted this in my recent sell rating on Starbucks, where I said:
“The US and China make up 61% of the company’s global footprint, and Starbucks also wanted to start a more aggressive expansion in China. In the first quarter results, China comparable store sales were down 14%, and it is hard to see that getting better with the prolonged lockdowns. “
But more importantly, I talked of the ‘elephant in the room’ which was a potential invasion of Taiwan by China. If that happens, will Starbucks walk away from China, which makes up a bulk of its sales and future expansion plans? As Howard Marks said, there will likely be more of a premium put on ‘the safest and surest’. That discounts these companies who are seeking aggressive expansion in China to prop up their stock prices.
On the subject of stock buybacks, Starbucks founder Howard Schulz has taken over the reigns and his first move has been to pause the company’s stock buyback program.
“This decision will allow us to invest more into our people and our stores – the only way to create long-term value for all stakeholders,” he said in a press release. “
If the current market downturn becomes a protracted correction then we could see other companies follow suit as capital is harder to raise and fears exist over further lows, or sideways movement for growth.
A recent podcast from Goldman Sachsalso discussed the end of globalization and had an interesting take on China, that the world is likely to split into two economic blocs. “We are arguably moving into a world where there is going to be much more deliberate alignment into Chinese and American economic blocs,” Adam Posen said.
“A number of countries, either voluntary or not, are going to be increasingly forced to choose… It does not prevent a certain country from deciding it wants to do a deal with Europe or China. It doesn’t prevent an individual business from getting bigger. But I think we are on a more accelerated path of having holes in the fabric of globalization. I think those holes are getting bigger and more frequent. ”
However, he added:
“I don’t think a significant decoupling of the world economy or significant disintegration is in the cards,” Rodrik says. “We’re just talking about a natural, in many ways, a desirable retrenchment from what I’ve called hyperglobalization, the kind of globalization we had in the last few decades. My guess is that we will try to find a happy medium that avoids some of the excesses of hyperglobalization and the dangers of autarky. ”
Former Chairman of the investment bank, Jim O’Neill, had a different outlook in the report:
“There is no evidence to support this fashionable notion of deglobalization,” O’Neill said. “Last year, global trade growth accelerated sharply, so much so that it was back above the trend line of what was going on pre-2008… So, I’m very, very dubious about this view.”
Those final comments seem a little naive, considering we didn’t have a Russian invasion of Ukraine last year that threatens to engulf the Eurozone.
Despite the current fear amongst investors, we can see that the Nasdaq index has not even completed a 38% Fibonacci technical correction from the 2009 financial crisis lows. If the era of globalization and cheap money that fueled the rally has peaked, what will constitute the end of the correction and a market realization of the new, new normal?
The market is undergoing a correction as uninterrupted global growth expectations are being revised. A toxic mix of inflation, supply chain issues, and tighter monetary policy is colliding with hostilities between previously friendly trade partners. The investment landscape has changed, and investors must be wary of rushing to catch the bottom in some of yesterday’s market winners. The game has changed, and it is time to readjust our expectations because some stocks were given a pandemic pass and will now rebound in the new reality.
Cost of capital is rising, supply chains are changing and the stock buyback juicing of stock prices is also under threat. Globalization may not be coming to an end, but investors would be wise to retreat from emerging markets and focus on domestic stocks that can weather the multitude of storms currently present. In the coming weeks, I will offer up my ideas on who some of those companies are.