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Investors bet Ukraine war will prompt companies to bring production onshore

Large investors are betting that the war in Ukraine will cause companies to pull production closer to home in a significant redesign of global supply chains.

For decades, broad investment issues have revolved around the idea that cheap offshore production and slippery global supply chains can reduce costs for companies and foster low inflation.

But the war, with its impact on the supply of goods in addition to aversion to doing business with Russia, accelerated a rethinking.

“The Russian invasion of Ukraine has put an end to the globalization we have experienced over the past three decades,” wrote Larry Fink, CEO of BlackRock, the world’s largest asset manager. Annual letter To shareholders this week. “A large-scale reorientation of supply chains will be inherently inflationary,” he added.

Fink is not alone in raising this issue in recent days. Howard Marks, co-founder of Distressed Debt Investor Octary Capital Management, warned this week in an opinion piece by the Financial Times that the pendulum of globalization is Swinging backwards Towards local sources.

Foreign operations “cause countries and companies to be dependent on their positive relations with foreign countries and on the efficiency of our transportation system,” he said.

The last three decades have marked a period of rampant globalization as companies have reduced costs by relocating large parts of their production to the sea and using cheap labor. This helped keep price pressures low and helped allow central banks to hold interest rates, and increase investment in risky assets. But it’s creaking now.

“The Ukraine war is part of a pattern of supply chain disruptions that are becoming more frequent and severe,” said Dan Swan, a co-leader in McKinsey’s operational practice, pointing to the US-China trade war, the blockade of the Suez Canal last year and the corona plague.

All of these focused on supply chain sovereignty and local manufacturing facilities. The rising demand for semiconductors during the epidemic has revealed how the US and Europe share of global semiconductor production fell from about 80% in 1990 to only 20% in 2020 and led to large investments in semiconductor production in the US.

At the same time, the war in Ukraine highlighted the dangers of Europe’s dependence on Russian energy exports, especially natural gas. Gas prices in Europe, used for everything from heavy industry to home heating, have risen Record highs In recent weeks there have been concerns that Russia may cut supplies in response to Western sanctions. This has increased the pressure to accelerate investment in renewable energy.

Germany on Friday swore allegiance Get rid of Russian gas By mid-2024 and said it aims to become “virtually independent” of Russian oil by the end of the current year. The US has already blocked Russian oil imports, while the UK expects to do so by the End of 2022 – Factors that helped cause crude oil prices to soar well above $ 100 a barrel.

“The three mega-trends that have helped companies generate huge profits over the past 30 years, namely the trend of long-term nominal interest rates, the trend of corporate tax rates and globalization, are reversing at the same time,” said Thomas Friedberger, Deputy Prime Minister at Tikehau Capital, Asset Manager Alternatives at 34.3 billion euros.

“We need to learn to invest again in an inflationary environment,” he said. “It injects asset prices, compresses multipliers and puts pressure on corporate profits. It can only be overcome by asset managers who position themselves to take advantage of this trend: energy transition, cyber security and digitalization. This is going to be a much more complicated environment for investors. “.

However, everything also opens up opportunities for fund managers. “There will be a lot of opportunities for stock pickers because there will be a lot of fragmentation within the sectors,” said Monica Defend, head of the Amondi Institute. She pointed to the energy and security sectors where there is both a political and economic need to pursue “strategic autonomy.”

Virginie Maisonneuve, a global CIO shareholder in Allianz Global Investors, said the change would drive innovation, for example linking renewable energy with artificial intelligence to improve efficiency.

“Although on the surface it looks like it’s very inflationary, it’s sector after sector and needs to be looked at with the overall costs and related policies, which will include fiscal policies or special balances policies,” she said. The use of artificial intelligence, for example, may lower costs.

Friedberger of Tikehau said that in the end, de-globalization represents an opportunity to build a more sustainable economic model. “This very global economic model in which companies and governments and economists have sought endless short-term growth at all costs to justify high levels of debt and high levels of non-working valuations,” he said.

“It has an impact on the climate, on biodiversity, on social inequality. The fact that these crises force us to try and build a more sustainable economic model is certainly not necessarily bad news for the world.”

Investors bet Ukraine war will prompt companies to bring production onshore Source link Investors bet Ukraine war will prompt companies to bring production onshore

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