Chaos in society and the economy leads to fear. Investors look for safe havens. Countries take measures to stockpile strategic goods including food, fertilizer, and fuel as well as strategic minerals. As the war in Ukraine continues protectionism is rising throughout the world. Understanding protectionism and your investments will be one of the paths to success as the forces of Covid shutdowns in China, inflation in the USA, and the prospect of a prolonged war in Europe cloud the markets.
Shortages of Food, Higher Prices, and Your Investments
A month ago, we wrote about the possibility of Ukraine not having a harvest in 2022 due to the war. Now Ukraine has chosen to reduce exports of cattle, oats, wheat, and sunflower oil to ensure adequate supplies for its own population. Meanwhile, Russia is banning foreign sales of fertilizers, grains, and sugar. Some of this certainly makes sense because of Russia’s invasion of Ukraine and subsequent sanctions against Russia. However, Turkey is no longer exporting butter, lamb, goats, corn, vegetable oils or beef and Indonesia has halted exports of palm oil of which it accounts for 50% of exports in a normal year. Consequently, prices for commodities like wheat have flirted with double their price year on year and crude oil is up 50% year on year. Where should you be investing in these trying times?
Is It Time to Invest in Exxon?
The oil giant Exxon has seen its stock go up nearly 50% this year and its trading above pre-pandemic levels by about $8 a share. Will this last? Will western oil companies like Exxon be able to fill the gap left by Europe not buying oil and natural gas from Russia? And will they make a profit doing so? These are good times for XOM but short term profits may be helping disguise long term concerns. The world will always need petroleum products but is steadily shifting to renewable sources of energy. While the Europeans will be happy to buy natural gas, oil, and coal from sources other than Russia over the next few years they are likely to accelerate their move to wind, solar, and nuclear power to ensure that they never again are at the mercy of a crazy Russian bent on reestablishing the Soviet Union’s dominance over Eastern Europe.
Are We Seeing the Demise of Open Markets?
Forty-seven nations have capped exports on one or more foods or fertilizers. Most of this has come since the invasion of Ukraine. Meanwhile China persists in its zero tolerance policy for Covid slowing exports, slowing the supply chain, and helping fuel the worst US inflation in 40 years. Before all of this the US and EU have been looking at reshoring manufacturing and securing raw material supplies that do not come from or move through China. The dream of open markets across the globe appears to be losing ground as countries take sides, take advantage of Russia’s need for allies and customers (at bargain prices for things like oil), and stop exporting in order to ensure supplies at home.
Secure and Resilient Supply Chains
Treasury Secretary Yellen recently stated that the pandemic and now the war in Ukraine have taught us that while we had efficient supply chains, they were not secure and not resilient. She noted that the US would like to avoid excessive protectionism. US trade needs to be reoriented to “trusted partners.” This must happen, she said, even at higher costs for customers and producers. The price of secure supply chains will likely slow global growth and allocate prosperity to different sections of the globe.
Cascading Export Restrictions and Global Recession
A business school study example of what is happening is how Russia and Belarus first cut exports and then countries along the trade route for wheat from Ukraine followed suit, Moldova, Serbia, and Hungary. Then major importers of wheat followed suit, Egypt, Algeria, and Lebanon. If Putin goes ahead and declares all out war on Ukraine and forces a complete mobilization the war will be protracted and increasingly bloody. The effects of protectionism and your investments will be increasingly pronounced. Any and all actions by the Fed to stem inflation look increasingly likely to propel the US and then the world into a recession or worse.
Investments for a Protectionist World
As things get worse beware of investments in companies unable to cut their ties with Russia first and China second. Beware of commodity-related investments that are likely to be torpedoed by across the board export restrictions. Beware of “zombie” story stocks with high debt loads. And look for stocks that deal exclusively in the USA or trading partners that are allied with the US.