Reversing globalization could cause pain and profit for companies

Published Sat, Apr 9 20227:38 AM EDTUpdated Wed, Apr 13 20228:53 AM EDT

Patti Domm @in/patti-domm-9224884/@pattidomm

Russia's invasion of Ukraine has fast forwarded a shift away from the decades long trend of economic integration and globalization, and that will create both challenges and opportunities for American businesses and investors. There is by no means a clear road map to the reconfiguration of global commerce in a potentially new Cold War era. But economists say the forging of global supply chains and low-cost manufacturing was a deflationary trend, while breaking globalization apart will be inflationary. Imagine, for instance, a slow evolution that will take years or even decades to play out as companies relocate plants, rebuild supply chains, refocus product lines and rethink marketing. "It means more onshoring than offshoring. That's inflationary," said Dan Niles, founder of the Satori Fund. "This is not going to happen overnight. We spent decades putting manufacturing into the Far East. It's going to take a lot to get away from that reliance," Niles said. For some companies, "it's going to be pretty painful." For investors, there will also be unique challenges. Each company, even within the same industry, will be impacted differently by the costs and logistics of potentially relocating operations, securing new sources for supplies and maintaining a workforce at potentially higher wages. It means picking companies that are able to best withstand these headwinds or are in sectors that will directly benefit from these changes, like infrastructure, energy, materials, industrials and some technology. As companies reconfigure supply chains, countries are also expected to realign their economic and political alliances, and there will be both winners and losers. Niles said the trend has impacted how he invests. For instance, he made a call in late December to shift from the more global bank JPMorgan Chase to a domestic bank ETF, SPDR S & P Regional Banking ETF. He said he was anticipating geopolitical events would become a factor for markets. He said he anticipated a possible invasion of Ukraine by Russia and was concerned China could move to take Taiwan, something he still expects could happen. JPMorgan CEO Jamie Dimon warned this week the bank could lose $1 billion in its Russia exposure. Niles said some companies that have already made efforts to increase domestic production, like Intel, are also more attractive. "It's really going to require nimble managements that are going to navigate tariffs, the threat of tariffs, the redundancies of being in the Asia block and Europe as well. It's going to evolve slowly," said Joe Quinlan, head of CIO market strategy for Merrill and Bank of America Private Bank. "The biggest thing is the guidance is going to have to be increasingly honed in with how do you view the world? How is the world evolving to you? … How are you managing these supply constraints globally and how are you finding the demand in terms of slower growth in Europe and China." Quinlan said he expects companies will locate in specific markets where they have customers and have shorter supply chains within markets. "The U.S. is only 25% of the world's GDP and we have less than 5% of the population. No multinational can grow their earnings without the external resources. It's definitely become more challenging," he said. "My take is there's been a lot of sand thrown in the gears of globalization, but at the end of the day, companies — U.S. companies in particular — need to be overseas now more than ever. They need the resources, the human capital and markets," said Quinlan. Russia breaks world order Quinlan said globalization kicked off in the 1980s, but the collapse of the Soviet Union in the 1990s drove it even more. Another boost came when China joined the World Trade Organization in 2001. "It really blossomed in the 1990s, really up until the financial crisis," he said. Globalization made the world smaller. Airlines, hotel chains, Hollywood entertainment, consumer brands, financial services fanned out across the globe, as companies looked for new growth opportunities. American companies, particularly tech, anchored manufacturing in China and in its Asian neighbors, seeking cheaper labor and new markets. The Russian invasion of Ukraine has shown that too much integration is not a good thing. Russia's position as a commodities warehouse to the world has made its