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Axis of chaos: Supply chains, energy and inflation

Investors have been warned that inflation is going to sting.

john HeadshotsTRY sq John Berry 3 minute read

There are no simple answers for investing in a complex world, especially when chaotic issues start feeding on each other.

Armadas of container ships queue for unloading worldwide, with ports like Los Angeles’ moving round-the-clock to ease bottlenecks. More ships and cranes isn’t necessarily the answer. It’s not a problem on sea, it’s actually a problem on land.

Covid-19 caused production and consumer spending to stutter. Economies later reopened and spending surged, helped by governments unleashing US$10 trillion (NZ$14 trillion) of stimulus.

There would always be unexpected consequences. Massive US and UK truck driver shortages meant transport turmoil. Messy logistics has left empty containers stuck in the wrong part of the world.

An energy supply crunch compounded things, with the natural gas price briefly surging 60 per cent and the UK running worryingly short of fuel.

China has had power stoppages and faces a price spike. China will now likely export inflation not deflation, making China’s power problem a global pricing problem.

Since the 1990s our world has built an inter-dependent ‘just in time’ supply chain. This brought everything together just when needed, avoiding storage costs and optimising global manufacturing.

The world relied on complex planning across shipping, communications, materials sourcing and staffing. This worked fine when everything ran relatively smoothly, but with an extended global pandemic there’s a train wreck.

Governments fret about dependency on other countries for pharmaceutical ingredients, semiconductors, cloud services and rare earths. They worry there isn’t time for a market-led solution, and believe national security requires intervention.

Improving supply resiliency ultimately means bringing key parts of the supply chain closer to home. But incentivising regional trade, rather than global trade, will increase costs. That’s another inflationary problem.

So cost pressures are everywhere. Excess consumer demand, transport bottlenecks, energy prices and on-shoring production.

Rising global inflation has implications for investors and investment returns. It’s hoped the inflation spike will be short and transitory – but ‘transitory’ may mean a year rather than mere months.

For many corporates, global disruption and price pressures will impact earnings. Margins will squeeze for those with complex supply chains (like automotive and tech hardware) or who can’t freely lift their prices.

Service providers and software companies will be impacted less. For them the challenge will be on-going access to skilled staff.

This also has implications for investors looking through an ethical lens. From an environmental perspective, decarbonisation of the global economy must be managed sensibly to avoid power price spikes and energy insecurity. These risks simply feed doubts that clean energy can provide a reliable future.

From a social perspective many less developed economies create jobs by being the world’s factory. Those jobs are at risk if supply chains reset. Food prices globally jumped around a third over the last year, and this inflation often hurts lower income earners the most.

Global supply chains need rewiring to minimise disruption, but that will likely take years not months. We need to stop and even wind back vast money printing globally to make sure our dance with higher inflation is only transitory.

We have some big problems with no easy overnight solutions. Don’t expect the ‘axis of chaos’ from supply chains, energy and inflation to be tamed any time soon. We’re not yet in the danger zone but a warning light is flashing - the risk of these ‘transitory’ issues becoming more ‘permanent’ is rising.

- John Berry is Chief Executive of ethical fund manager and KiwiSaver provider Pathfinder Asset Management, which is also part of  Alvarium Wealth. This article is not financial advice, however seeking professional financial advice is always a good idea.

(This article was originally published by Stuff October 28, 2021) (Picture Source: Shawnanggg)

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