Does the 2022 stock market correction mark the end of globalisation?
A toxic combination of the covid-19 pandemic and Russia’s invasion of Ukraine could now have permanently damaged global trade.
Globalisation, the geopolitical process by which the world becomes increasingly interconnected, sped up after the fall of the Berlin Wall in 1989. The process has massively increased global trade, as well as the production of goods and delivery of services. Free trade, encouraged by the World Trade Organisation, has rocketed.
Transport improvements have made economies of scale possible, while inter-state communications have vastly improved. And more economically developed countries have benefitted from the low-wage, high-skill economies of countries like India and China.
Meanwhile, less economically developed countries gained new jobs, high levels of wealth, and accumulated valuable foreign currency. And in the process, many have closed the wealth gap.
And perhaps most strikingly, the world’s largest companies are now multinational, often wielding a level of financial firepower previously guarded by smaller nation states. These transnational corporations are often accused of offshoring manufacturing to countries with the lowest wages and limited employment and environmental legal protection.
And of course, many believe globalisation favours wealthier countries in trading partnerships.
But regardless of any ethical concerns, the march of globalisation continued until March 2020. Then the covid-19 pandemic-induced crash began. Global markets, whether the FTSE 100, S&P 500, Nikkei 225, or Hang Seng, plunged by as much a third in the space of a month.
Suddenly, the ‘just-in-time’ model that had substantially reduced costs for all parties now became an economic anchor on the global economy. Supermarket shelves were laid bare of essentials as prosaic as pasta and toilet rolls, amid minor social unrest and billions of lost profit.
Concerted scientific effort began, and relatively rapidly, vaccinations saw coronavirus disease wrested back under control. And after November’s Omicron scare, it appeared as though 2022 would see a return to business close to normal.
Stock market correction
Then on 24 February, Russia invaded Ukraine. Suddenly the supply of multiple globally important commodities were hit simultaneously; whether through war or sanction, the price of oil, natural gas, wheat, sunflower oil, gold, iron, nickel, palladium, platinum and more rose to record or near-record highs.
And it’s not hard to see the result of this second shock. Politically, European dependency on Russian gas, with the continent relying on Putin for 40% of supply, means that the blade of economic sanctions remains blunted. The US, which produces enough Brent Crude to support itself, but has insufficient infrastructure to process its light, sweet crude, is seeing sky-high inflation that it cannot protect itself from.
Nickel is now in a supply shortage that cannot be solved. The subject of trading stoppages at metal exchanges in both London and Shanghai after soaring over $100,000/tonne, the metal is critical to the production of most lithium-ion batteries in EVs.
Palladium, essential to semiconductors, is also in short supply. Russia’s Nornickel is the world’s largest producer of both palladium and battery-grade nickel. And semiconductors are essential to 21st-century communications, EVs, and the internet itself.
The supply chain underpinning these critical metals has been shown to be singularly fragile. After being mined in Russia and Ukraine, much is sent to China and Taiwan for manufacturing, to then be shipped to customers worldwide.
But in Shanghai alone, China’s Communist Party has imposed draconian ‘zero-covid’ policies, keeping the world’s busiest port essentially shut to most traffic. The lockdown is so severe that citizens are being locked into their apartments behind metal fences.
Planning for potential supply chain shocks has been woeful. According to the Financial Times, inventories of aluminium, copper, nickel, and zinc at the London Metal Exchange have plunged by as much as 70% over the past year.
In the UK, the refusal to fund Gas storage facilities has seen the country at the mercy of rocketing global prices. The country has enough in reserve for only four winter days’ of use and holds only 1% of Europe’s reserve capacity. And currently, the EIA only requires members to hold a 90-day emergency supply of oil. Even the USA has historically low inventories.
Wheat, perhaps the least important commodity to the West, is critical to poorer nations. Ukraine, the ‘breadbasket of the world,’ together with Russia, export more than a quarter of the world’s wheat. And Russia produces around 15% of the globe’s fertilizer.
With much of this wheat previously destined for some of the poorest countries on Earth, the risk of widespread famine is increasing.
The end of globalisation?
Deutsche Bank warns a ‘major recession’ is coming. The era of ultra-loose monetary policy is over; inflation is skyrocketing, and central banks are increasing interest rates to confront it.
With Russia now locked out of SWIFT, BlackRock CEO Larry Fink believes ‘the Russian invasion of Ukraine has put an end to the globalisation we have experienced over the last three decades.’ Meanwhile, the EU’s Economic Commissioner Paolo Gentiloni thinks ‘this crisis will also spell the end of globalisation as we have known it and reshape global alliances.’
While many investors will be tempted to retreat to the safe haven of defensive stocks, the seismic cultural shift that will result from shrinking globalisation could create plentiful opportunities for those with a healthy appetite for risk.
Long-term changes could include increased investment in domestic manufacturing capabilities, and more warehousing to smooth over supply chain stocks. There could be additional subsidies for domestic manufacturing and even increased oil exploration outside of Russia.
In addition, stronger diversification of raw material sources appears likely, with Indonesia and the Philippines already expanding nickel production.
The lasting effects on the energy sector could be the most highly pronounced. BP and Shell have both exited Russia, despite Russia accounting for a third of BP’s oil supply last year. And the G7 has announced it is phasing out all Russian oil.
While the oil majors could benefit from the transition to renewables, one other beneficiary candidates include SSE by dint of its market-leading portfolio of wind farms. Alternatively, the demand for nuclear power, which already accounts for 10% of global energy needs, could see the uranium price explode.
REITs could become central to investor portfolios as warehousing demand increases. Colliers reports that the take-up for large units is up 11% on its five-year average, with logistics site availability down 22.4% year-over-year. Len Rosso, head of industrial and logistics, believes ‘the supply and demand imbalance for industrial space shows no sign of lessening,’ despite 15.5 million square feet under construction.
Of course, these are only a few of the potential growth areas for the brave investor.
But the key takeaway is this: after decades of globalisation, nation states and transnational corporations seem more prepared to sacrifice ultra-cheap goods for security of supply.
* Based on revenue excluding FX (published financial statements, October 2021).
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