Inflation has been stocky for over a year now, which has led to more and more monetary tightening by the US Federal Reserve and other central banks. Larry Fink, CEO of BlackRock believes this is not going to change anytime soon.
“(The) tradeoff between price and security is one of the reasons I believe inflation will persist and be more difficult for central bankers to tame over the long term,” said Fink. “As a result, I believe inflation is more likely to stay closer to 3.5 percent or 4 percent in the next few years.”
Jerome Powell, Chairman of The US Fed, has time and again rued the fact that inflation is not going down despite interest rates peaking to close to 5 percent from near zero within a year. This, according to Powell, makes it very hard for the US Fed to pause monetary tightening.
Fink believes the structure of the economy has changed drastically due to geopolitics. The repeated shocks of the past few years have also dramatically reshaped supply chains, he said in a letter to shareholders. Highlighting the instances, he underlined that there is a need for supply chains to be resilient. Russia’s invasion of Ukraine and growing geopolitical tensions have brought national and economic security front and centre.
The established supply chain unravelled especially in wake of the pandemic. Now, every country wants to produce things – from food and energy or computer chips and AI – locally, or not depend on just one supplier, especially if they tend to be adversary nations.
A cue in point is Atmanirbhar Bharat and China + 1 policies.
“They (countries) want to source essential goods close to home even if it means higher prices,” said Fink. “These shifts are producing a less integrated, more fragmented global economy. Leaders in the public and private sectors are essentially trading off efficiency and lower costs for resilience and national security. It is understandable public policy. But for investors, it is important to recognize the risks and opportunities it creates.”
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One good example is electronics manufacturing or solar module manufacturing in India, which boomed after increased domestic focus. This created investment opportunities in Dixon Technologies of the world.
The Indian government has been announcing more and more sops for industries to make products globally, not just to increase jobs or security but also to save precious foreign currency. One example is chip manufacturing, for which both India and the US want to develop an ecosystem at home.
“Governments are playing a bigger role in where products can be sourced and where capital should be allocated as they look to keep the production of critical components inside their borders. This means capital won’t necessarily be allocated to the businesses that deliver the maximum market return regardless of where they are located,” said Fink.
Thus, Fink says this new economy of fragmentation brings risks – like elevated inflation – but also opportunities.
“I believe that North America could be one of the biggest global beneficiaries. We have a large and diverse labour force. We have abundant natural resources, with the potential for both energy and food security. Public policy is helping to keep chip manufacturing in the US, and the latest innovations in AI have become a new preoccupation. Other national winners will emerge as well.”
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