We’ve entered the third month of this heartbreaking war in Ukraine. The courage and grit of the men and women fighting Russian troops who seek to dominate or annihilate the Ukrainian people is awe-inspiring.
As we contemplate the longer-term implications of the war, either accelerating existing trends or embarking on new ones, three areas come to mind: first, a new military reordering; second, a revival of energy security and independence; and, third, supply chains and deglobalization. These three areas will likely play out over the coming months and years. Knowing the end game of each is impossible given the uncertainty of so many interconnected inputs. But, we have, nonetheless, outlined some thoughts to keep in mind as we witness world events.
Everyone knows about the worldwide supply chain issues that started during the pandemic and were exacerbated by the huge rebound in demand for consumer products/goods. Despite recent news of retail sales slowing, supply chain disruption continues to pressure delivery, availability and pricing of goods. This, in turn, is contributing to the multi-decade highs in inflation. In addition, the war in Ukraine catapulted already rising energy prices into the stratosphere, further feeding the inflation beast. Finally, add in other commodity shortages, including the fears of global food shortages, and voila: a hat trick of bad news.
To consider the impacts of these three areas — energy/commodities, military reordering and supply chains — we begin by outlining some of the recent announcements that will impact the longer-term outlooks for these three areas.
Let’s start with energy and other critical commodities:
Energy security and energy policy now look to top of mind for many countries. This, in turn, may lead to a faster implementation of renewables to counteract fossil fuel dependence. But this is a battleship that cannot turn on a dime. Watch how short-term changes interact with long-term goals (more nuclear for example?).
It’s clear that deglobalization of trade related to energy (and other important commodities, like minerals and food) has done an about-face. Trade ties are no longer viewed as providing mutually assured peace and have been replaced by a desire for energy, minerals and food independence and/or diversification.
In addition to energy security, we’ve seen military readiness and spending come front and center in our new world order:
Food security is yet another big issue relating to the war and its consequences. A large portion of global wheat, corn and barley supply comes from Ukraine. As a result, food prices have surged. An increase in world hunger could be the upshot.
We have no crystal ball for the multi-faceted political ties of countries. However, the list of nations scaling up defense is impressive. In addition, President Putin’s calculation that NATO would not be a factor if Russia invaded the Ukraine now seems ill advised. Not only has NATO coalesced, but it also looks to be getting stronger.
Finally, the prognostications that supply chain issues would begin to abate in 2022 were not prescient. To be fair, the war added an unanticipated set of issues to the pandemic and post-pandemic problems. While the consumer demand for goods, which was turbo-charged during 2020 and 2021, is not over, we do see signs of services increasing and some goods decelerating. For example, in the March inflation data, airline ticket prices were up double digits (10.7 percent), while used cars were off (-3.8 percent) and some categories of apparel were down.
So, if demand for goods does subside in favor of services (as was the pre-pandemic state of the world), we may see some supply chain problems easing. However, there is undoubtedly a fundamental shift in how companies think about necessary materials and components. There are frequent discussions on CEO earnings calls of supply chain pressures and the inflationary knock-on effects. Clearly, some reshoring and/or diversification of suppliers will occur. This adds to the deglobalization theme you may read about. But beware, this Venn diagram of interconnectedness is not quickly undone.
The war wore down the already pandemic-frayed globalization ties in supply chains, energy and commodities. In many ways, the economic ties of countries resulted in a laissez-faire attitude to potential conflicts, and, consequently, military spending dropped. Again, with no crystal ball on how this plays out in the long term, it is abundantly clear changes are afoot. Keep your eyes peeled for more announcements of reshoring and diversification of suppliers. This, coupled with the energy, food and critical commodities changes, will be worth looking out for. The Greatest Show on Earth was a 1950s movie (and the Ringling Brothers’ slogan). It is probably worth buying a ticket for, or better yet, in 2022 lingo, streaming. Let’s watch how this movie plays out.
Segal Marco Advisors provides consulting advice on asset allocation, investment strategy, manager searches, performance measurement and related issues. The information and opinions herein provided by third parties have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed. Segal Marco Advisors’ R2 Blog and the data and analysis herein is intended for general education only and not as investment advice. It is not intended for use as a basis for investment decisions, nor should it be construed as advice designed to meet the needs of any particular investor. Please contact Segal Marco Advisors or another qualified investment professional for advice regarding the evaluation of any specific information, opinion, advice, or other content. Of course, on all matters involving legal interpretations and regulatory issues, investors should consult legal counsel.
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