gGlobalization in all its forms, from social to economic to political, has been on the rise since about the 1970s, and I sincerely believe that it has had more advantages than disadvantages on average. Although it may seem hard to believe right now, the real cost of finished goods has come down over the decades, and there is evidence that the world has become more peaceful, with fewer wars and war-related deaths than before. the past.
It goes without saying that the events of the past two years, including the US-China trade war, the Covid pandemic and now the Russian-Ukrainian war and international sanctions, have called into question the merits of globalization. Inflation has reached its highest level in 40 years and Western Europe faces a severe energy crisis, prompting policymakers and multinationals to rethink the supply chains that crisscross the world and source materials and labor from hostile jurisdictions.
Russia’s invasion of Ukraine “ended the globalization we’ve known for the past three decades,” says Larry Fink, co-founder and CEO of BlackRock, the world’s largest asset management firm . In last week’s letter to shareholders, he adds that “companies and governments will also look more broadly at their dependencies on other nations” due not only to war but also to the pandemic. Nearshoring, the practice of moving business operations closer to home, could benefit Mexico, Brazil and even the United States
Lockdown of Chinese exports
An important country that Fink does not mention is China, but it is essential to understanding the consequences of uncontrolled globalization. China has long been the factory of the world. Of the 10 busiest seaports in the world, six are in the Asian country. It is estimated that a third of the world’s maritime transport passes through the South China Sea.
Today, we see the risks of depending so heavily on a single country for the movement of goods. China is experiencing an unexpected increase in Covid cases, and because it has a zero Covid policy, it is closing businesses, factories and warehouses, especially in Shanghai, a major port city that is home to more than 26 million people. Those lockdowns were reflected in the March reading of China’s Caixin General Manufacturing PMI, which showed manufacturing activity was slowing at the fastest pace since the pandemic began two years ago.
China was one of six countries whose manufacturing PMI was below the 50.0 mark in March, the others being Turkey, Mexico, Myanmar, Kazakhstan and, with a reading of 44.1 , Russia. That was enough to push down global factory activity, as measured by JPMorgan’s global manufacturing PMI, to an 18-month low of 53.0.
Expect higher shipping costs
Although the port of Shanghai, the world’s busiest port, would have remained open, the blockage of shipments is worsening as trucks are not available to transport the products. According to data from VesselsValue, port congestion is at an all-time high, with the number of ships awaiting loading and unloading going parabolic.
Shipping giant Maersk warned customers last week that the closures will likely lead to even higher shipping costs, writing that “there will be longer delivery times and possible increased transport costs such than detour fees and highway fees”. These additional costs will in turn be passed along the supply chain to the end consumer, who already has to deal with runaway inflation.
Attractive gold and silver look
With shipping rates on the rise, I would take a long look at container shipping stocks, including Maersk. The group generated record profits last year as fares tripled following a surge in demand linked to the pandemic. Global disruptions, from the ongoing pandemic to the war in Eastern Europe, mean rates could remain high for some time to come.
Precious metals such as gold and silver also continue to be attractive. At the close of last month, gold was posting its best quarter since June 2020 on safe-haven demand.
A Capitalight Research report last week included a compelling picture of how gold and silver performed during certain geopolitical crises. Both metals have risen in every instance since the twin Iranian hostage crises of 1979-1980 and Russia’s invasion of Afghanistan. In this case, the price of gold doubled while silver rose 395%.
Although returns weren’t as strong in later events, they were respectable double-digits, underscoring the metals’ safe haven status. Since Russia invaded Ukraine in January, silver has risen 16%, gold 13%.
Capitalight analysts say “if the current crisis escalates into nuclear/chemical war, the price of gold and silver could double.” Nobody wants to see that, obviously, but I think it’s a good idea to have cover in case something like this happens.
Have a good week!
Originally published by US Global Investors on April 4, 2022.
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Holdings may change daily. Holdings are reported at the end of the most recent quarter. The following securities mentioned in the article were held by one or more accounts managed by US Global Investors as of (31/12/2021): AP Moller-Maersk A/S
The PMI is an indicator of the economic health of the manufacturing sector. The PMI index is based on five major indicators: new orders, inventory levels, production, supplier deliveries and the employment environment.
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