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Era of De-Globalization


Beginning in late 2020 when writing our 2021 Economic Outlook we tried to deduce what the longer term scars might be from the covid pandemic after the waves of the virus are behind us. In our mind the most likely shift would be a reordering of the global supply chain to onshoring which we coined “The Era of De-Globalization”. This was perhaps lazy because this trend had actually been in place before covid as world trade peaked in 2009 and has been slowly reversing since. Nevertheless, at our Pike Run Event in December 2021 we again highlighted de-globalization as a tail risk to the economy in the form of a geopolitical affair. Admittedly the event we had on our mind was a Chinese incursion in Taiwan, but instead we got the abrupt Russian invasion of Ukraine in February.

Why this is disruptive is because the post-WW2 world was shaped by globalization and the integration of the emerging/developing world. The most notable is China which since joining the WTO in 2001 has completely transformed their economy from agrarian based to a manufacturing powerhouse. India too with its large population has been blended with the world economy although not to the extent China has. And for the corporate world globalization was a huge boost for margins. Companies could build their products where it’s cheapest, sell them where they can get the highest price, headquarter in the domain where they would pay the lowest taxes, and relentlessly implement supply chain efficiency gains.

The flaws of the relentless efficiency were exposed during covid but even before that cracks were starting to show. The rise of China and decline of US & European manufacturing led to a rise in anti-globalization sentiment really taking hold in 2015. Unsustainable trade deficits and rampant intellectual property theft with China in particular boiled to a flashpoint kicking off the “trade war” in 2016 which sparked a rise in protectionism and geopolitical tension.Industrial companies began reducing the number of manufacturing locations in Asia since the peak in 2015, but covid and private sector lockdowns in China will further motivate western companies to lower their dependence on international manufacturing in our view.

And up to this point I have not even mentioned the rapid decoupling taking place with the exiling of Russia from the world economy in a number of weeks following the invasion of Ukraine. This rapid disconnect of Russia from the world energy market and the scrambling by domestic companies to fill the gap illustrates the intertwinement of the global economy. Going forward I don’t think all supply chain reordering will be as abrupt as we have seen with Russia, but I think the world is certainly returning to a Cold War esque structure with two competing, increasingly isolated spheres. On the other hand it's also possible that we aren't going to see de-globalization, but rather a shift of globalization consisting of manufacturing hubs rotating from China to other Asian markets, or even South America. Conceivably a combination of both is a possible outcome.


Impacts to the economy could potentially be a stickier inflation regime but a reshoring may also end up boosting domestic oriented companies.In the 2015-2018 period where “Buy American” sentiment surged and manufacturing began slowly reshoring, domestically focused S&P 500 companies saw dramatic outperformance versus export heavy peers. In this new era of de-globalization domestic medical tech, semiconductors, and critical manufacturing will likely experience a grinding tailwind and a capital investment cycle which could last for decades.

Commentary Disclosures: Covington Investment Advisors, Inc. prepared this material for informational purposes only and is not an offer or solicitation to buy or sell. The information provided is for general guidance and is not a personal recommendation for any particular investor or client and does not take into account the financial, investment or other objectives or needs of a particular investor or client. Clients and investors should consider other factors in making their investment decision while taking into account the current market environment.

Covington Investment Advisors, Inc. uses reasonable efforts to obtain information from sources which it believes to be reliable. Any comments and opinions made in this correspondence are subject to change without notice. Past performance is no indication of future results.

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