Market giants Larry Fink and Howard Marks say the Ukraine conflict will end globalization. Here are 3 key takeaways for investors.
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- BlackRock's Larry Fink and Oaktree's Howard Marks have predicted that globalization is coming to an end.
- The Russia-Ukraine war and COVID-19 are making companies and countries rethink their reliance on others, they said.
- Deglobalization would have dramatic consequences for the economy, and for investors used to a highly integrated world.
Globalization has shaped the world for the last 30 years, but it's now coming to an end. That's the view of two of the world's best-known investors, BlackRock chief Larry Fink and Oaktree chair Howard Marks.
"The Russian invasion of Ukraine has put an end to the globalization we have experienced over the last three decades," Fink wrote in his latest letter to shareholders last week.
A day earlier, Marks had shared a similar sentiment in one of his well-read memos. He said the war had made companies and governments realize how they'd become reliant on others.
"The recognition of these negative aspects of globalization has now caused the pendulum to swing back toward local sourcing," he said.
But what exactly is globalization? Economists at the Peterson Institute define it as the growing interdependence of the world's economies, people and cultures. It's brought about by crossborder trade in goods and services, as well as by flows of investment, people and information.
An end to the process would have dramatic consequences, not least for investors, who have become used to a highly integrated world.
Here are three areas where the end of globalization — if it comes — could have a profound impact.
Global energy markets
Russia's invasion of Ukraine has had a dramatic impact on the global economy and markets. No where is that more clear than in surging commodities prices. Brent crude oil, which stood at around $64 a barrel a year ago, is now trading at more than $110.
In Fink's view, higher fossil-fuel prices will help drive the transition to green energy. That means the prospects for renewable energy companies could be bright in the medium term.
"More than ever, countries that don't have their own energy sources will need to fund and develop them – which for many, will mean investing in wind and solar power," Fink wrote.
Yet the BlackRock boss was less optimistic about the short term. A need to cut back on Russian oil has driven countries like the US to increase their own fossil-fuel production.
Many investors have pivoted toward energy companies and commodities, which plenty believe are set to keep rising over the next year as the war plays out.
Inflation
Closely linked to energy is the question of inflation. It's above 5% in Europe and the UK, and has surged to a 40-year high in the US.
An end to globalization is likely to make things worse, Fink and Marks warned.
Marks highlighted how "offshoring" — in which companies use cheap foreign labor to produce their products — has led to a sharp fall in the cost of goods.
The end of that process could give working-class communities in the US and Europe a boost. But it could also drive up prices, simply because Western workers are more expensive.
"A large-scale reorientation of supply chains will inherently be inflationary," Fink wrote. "Central banks must choose whether to live with higher inflation, or slow economic activity and employment to lower inflation quickly."
Crypto and other opportunities
BlackRock's Fink, who previously suggested bitcoin might be worthless, now thinks digital currencies may have a role to play in a deglobalizing world. He said the war will force countries to reconsider their currency dependency.
"A global digital-payment system, thoughtfully designed, can enhance the settlement of international transactions while reducing the risk of money laundering and corruption."
Marks went into fewer specifics, but ended his memo on a hopeful note.
"After many decades of globalization and cost minimization, I think we're about to find investment opportunities in the swing toward reliable supply," he said.
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