Capital has been impacted too. Russian holdings were wiped out because of conflict in Ukraine and investors were forced to sell Chinese companies caught with sanctions, so investors have become wary of deploying capital internationally.
There’s a clear desire from policymakers and corporations to reverse some aspects of globalization and it’s starting to impact the economy and markets.
Understanding the implications
If deglobalization continues to accelerate, Generally, growth rates will be lower while inflation will be higher as goods and labor become less optimized. Economic cycles may become more volatile amid less international risk-sharing and corporate margins could be pressured, especially among the companies that have benefited from outsourcing labor. There’s also the potential for an increase in capex, especially considering the capex needs of the energy transition and a nascent commodity cycle.
Identifying the opportunities
Despite this rather negative picture for capital markets, opportunities remain. Commodities, for example, could see long-term tailwinds because. less efficient supply chains and competition with domestic industrial sectors for services tend to increase marginal commodity production costs.
What’s more, geopolitical instability creates supply risks. For example, at least 23% of oil production occurs in countries currently facing US sanctions.4 Countries may compete for resources, for example inputs into the energy transition, which can push up prices and further contribute to the deglobalization process.
Gold may stand to benefit both as a risk hedge to a more unstable world and from any weakening in the US dollar’s reserve status. In fact, central bank demand for gold spiked to record highs last year, possibly a result of reserve diversification away from the US dollar and euro after Russia invaded Ukraine.
US Steel companies are a good example of the commodity dynamics at play. Increased manufacturing construction and customers’ focus on a domestic supply chain currently support US steel demand. Meanwhile, tariffs driven by geopolitical concerns are in place, so increased imports cannot alleviate the tightness, which allows for the domestic steel industry to earn elevated profit margins.
Industrials, such as engineering and construction companies, could also benefit from domestic infrastructure spending and onshoring. After a long downcycle, capacity is limited and increased demand could see tightness and significant pricing power. Similarly, services that rent equipment to these engineering and construction companies could benefit. So, too, might rail services as transit between domestic manufacturing hubs increases.
Automation and staffing services could experience a boost from these trends. Decreased immigration and increased desire for local production could tighten labor markets, potentially increasing demand for staffing expertise and for substitution in the form of automation as wages grow.
Deglobalization is here
It appears highly likely that these trends will continue given the confluence of political and economic factors, but the path forward will likely take unexpected turns and the sectors and companies that benefit from shifting market dynamics will ebb and flow with the cycle. But, regardless of how deglobalization takes shape, we believe it will likely be a key market driver going forward.