It sounds like the world is back to normal.
Some people act like the pandemic never happened at all.
Which is understandable. Nobody wants to go back to the depressing time when the world was in lockdown.
We have made massive progress, and the relaxation of Covid rules is justified, in our opinion.
But investors should look past the most popular news of the moment… like the events of Ukraine right now… and try to understand what is really going on with Covid and how it may influence their decision-making this year and beyond.
There are some alarming signs… and some unjustified panic.
Let’s see what’s going on and what you can do about it.
Record Cases and Lockdowns in China
Shanghai, China’s largest city, is under a long lockdown. The country is implementing its “zero-Covid” policy there amid record case numbers due to the fast-spreading omicron variant.
“Zero-Covid” policy involves total control and maximum suppression of the cases. The goal is to reach zero active cases.
This is in contrast with other countries’ approaches that involved co-existing with the virus and managing outbreaks without trying to get to exactly zero cases.
Shanghai is a powerful financial hub as well.
Which means that investors should understand what happens there.
Guangzhou, a massive 18-million-strong city, recorded two cases recently. Now a mass testing program is underway.
Guangzhou is a big manufacturing center for automobiles, electronics, and petrochemicals. Honda, Nissan, and Toyota have factories based there.
Lasting lockdowns harm these manufacturers, of course. Their sales will suffer in the future as a result of these “zero-Covid” policies.
We can argue about their effectiveness… but it’s quite obvious that their economic impact is negative.
And it is apparent that the government of China has chosen to continue pursuing its aggressive pandemic policy.
It means that, as the virus is here to stay, we will potentially be looking at more lockdowns in various manufacturing and financial hubs in China.
And they are a big part of the global supply chains. Which will likely continue getting disrupted not only by the virus but also by the governments’ response to it.
The solution? Quite a few countries, like the United States, have started working on “onshoring” and “nearshoring.” These practices are the opposite of “offshoring,” which involved moving production capacities overseas to achieve cost savings.
Right now, the business world is doing the reverse. Seeing that globally stretched supply chains are vulnerable to even the smallest number of cases, manufacturers want to move their production facilities close to their end markets.
Investors should watch the companies they hold to understand if there’s a plan in place to secure supplies not only for this year but also in 2023 and beyond.
Covid isn’t going anywhere. To make sure that a company’s supply chain is resilient in 2023 and after, it needs to invest right now.
Those still relying on overseas partners might find themselves in a bind.
Covid Could Continue Driving Inflation
Moving production “onshore” could be costly.
After all, there was a reason why companies like Honda and Toyota have production facilities set up in Chinese cities like Guangzhou.
It’s just cheaper to make cars there.
So if they decide to invest and increase their footprint, say, in Europe, they will need to hire European labor.
And that’s expensive.
So in the future, we see prices rising regardless of where the Federal Reserve sets its interest rates.
There’s much more going on in the world than just the Fed deciding about whether to tighten or loosen its monetary policy.
The global business system is reallocating resources to more expensive countries. Simple as that.
That will drive prices up regardless of what politicians or other high-profile decision-makers say.
To win this game, companies need to not only manage their supply chains and make sure they are resilient but also have what’s called “pricing power.” This is the ability to increase prices without damaging their demand.
It’s tricky. Not everybody will be able to pull this off.
But investors need to start thinking about it now if they want to understand the risks their portfolios are exposed to.
Thank you for your loyal readership,The Financial Star