📈Why It Might Be The Beginning Of The End For This Deflationary Force We’ve All Been Enjoying For Too Long!

You know what they say, nothing lasts forever. Yet when we’re in the thick of it, we get so attached to the status quo that we can’t really imagine anything else. And if there’s one thing we can’t get enough of, it’s globalisation. You might not have noticed (until the pandemic came along!) just how complicated and interwoven our supply chains have become. For want of an example: the other day, I placed an online order for a t-shirt that travelled from Long Beach to Los Angeles to Leipzig only to finally make its way to me. This is no joke. I mean, what a journey. I’m getting tired just thinking about it! But this is exactly what our supply chains are like. They’re not about manufacturing and producing in the same country it’s selling in but rather in the country that’s the cheapest no matter how many thousands of miles away that is. The result: complex and convoluted chains that can fall apart in an instant.

The past 40 years of globalisation (aka manufactured in China, packaged in Vietnam and sold in America) has brought prices way down, keeping the lid on inflation firmly shut. Companies suddenly found themselves with a pool (or several) of low-paid workers that they could tap into. Since wages are one of the biggest fixed costs for businesses, keeping them down is their number one priority. And globalisation did just that. Companies were suddenly able to produce their stuff in, say, China (paying workers cheap hourly rates over there) while selling it to someone somewhere across the globe. Because cheap inputs mean cheaper outputs (yay) and higher profits (the real big yay for companies). 

The Dark Side

But not everyone has benefited from this bonanza. During one of my research projects at uni, I delved into the manufacturing of iPhones. Aka the dirty side of globalisation. People working for hours on end in terrible conditions inhaling all sorts of dangerous chemicals. But we don’t really think about the human cost of the things we use; from our phones to our perfumes to our cleaning products. We simply use them and move on with our lives. But if something is so cheap and/or mass-produced, somewhere people are being exploited. But companies think, why bother paying 10x the wage to employees in their country when you can simply hire workers (somewhere across the globe) for a fraction of the price.

I recently chatted to someone who works in a call centre (when it comes to customer service I like to talk to a human, not one of those bots!) who told me how she works 12-hour shifts in a windowless room. The ceilings are low, the lighting is artificial and there are hundreds of workers crammed into the same room. And going for a loo break isn’t always possible, she tells me. Just recently, P&O ferries has, after laying off its entire UK workforce, hired Indian workers for the sum total of £1.81 per hour! How this is all still going is too sad to think about.

What these (ridiculously) low labour costs translate into is lower input costs which mean ever higher profit margins. And despite what current stories tell you, it’s earnings that ultimately drive share prices. Not the other way round! So low labour costs seem to be good for everyone. Apart from the actual labourers. But then came covid and it shone a spotlight on all things ESG (environmental, social and governance) and companies, consumers and investor communities suddenly realised they better take a stance. They have to change something. Or else it’ll change them. Though what with all that’s still going on, clearly we’ve a long way to go.

After uni, I’m excited to be joining a B-corp company which is all about balancing purpose and profit. The world needs both. And as an investor, I’m always on the lookout to support these kinds of businesses. You get returns while knowing that you’re putting your money to good use. And I actually recently came across a female-founded (hurrah!) underwear company that’s B-corp certified. I ended up investing in the fundraising round and funnily enough (though not actually all that funny) 80% of the investors were male! We’ve clearly got a long way to go on this front too. But companies are definitely becoming a whole lot greener and it’s a step in the right direction. We’ve all gotta do our bit.

Slowly Slipping Away

Anyway, while the pandemic was busy disrupting our fickle supply chains, Russia’s sudden invasion of Ukraine did nothing to stop that. What will this war do to this never-ending globalisation fest? I can’t imagine that countries will suddenly want to become outwardly looking. When it comes to war, it’s each man (and country) for himself. Just look at all these shortages we’re experiencing. Trust me, there’s nothing more political than rising fuel and food prices. But some stuff (ahem, raw materials) aren’t exactly located in all four corners of the earth but rather in localised areas (think China, South America and, yes – Russia!) and for this, well, we’ve no choice but to import. But after the importing stage, companies should reduce the number of link within their supply chains or else they risk becoming undone. 

Companies need to be building where their customers are instead of halfway across the globe. This will reduce their reliance on those complex chains and imports. And the thing is, a large-scale shift in how supply chains are run (from super-global to somewhat local) will be inflationary. And we’re already starting to feel the pain. Psst: inflation’s now at 8%. So get ready for that. And make your portfolios are ready for it too.

Companies and countries do not want to run the risk of being too dependent on others for anything. Cause look what happens when dependency rises! Problems start to happen and you’re backed into a corner. Exactly what’s going on right now. So companies are, whether they like it or not, slowly pulling back from their once-global supply chains and this will change everything. 

In the wise words of Marshall Goldsmith: “What got you here won’t get you there”. Make sure that you and your portfolio are prepared for anything. Don’t get caught off-guard. Plan for it all. For if there’s one thing to expect from all this: it’s inflation. Buckle your seatbelts. 

Disclaimer: This blog is not investment or financial advice. It is my opinion only. This blog is not a personal recommendation to buy/sell any security, or to adopt any such investment strategy. Always do your own research before you commit to any investment.