Big investors are betting that the Ukraine war will significantly reshape global supply chains by prompting companies to bring production closer to home.

For decades, a broad investment thesis has revolved around the idea that cheap offshore manufacturing and smooth global supply chains can lower costs for companies and promote low inflation.

But the war, in addition to the distaste for doing business with Russia, has had an impact on commodity supplies and hastened rethinking.

Larry Fink, chief executive of BlackRock, the world’s largest asset manager, wrote in his article: “The Russian invasion of Ukraine ended the globalization we’ve experienced over the past 30 years.” annual letter To shareholders this week. “A massive repositioning of supply chains is inherently inflationary,” he added.

Fink isn’t alone in raising the issue in recent days.Howard Marks, co-founder of distressed debt investor Oaktree Capital Management, also warned in an opinion piece in the Financial Times this week that the pendulum of globalisation is moving. swing back Turn to local sourcing.

Offshoring “makes countries and companies dependent on positive relationships with foreign countries and the efficiency of our transportation system,” he said.

The past three decades have marked a period of rampant globalization as companies cut costs by moving much of their production overseas and using cheap labor. This helps keep price pressures low and helps central banks drive down interest rates and increase investment in risky assets. But that’s crunching now.

“The Ukraine war is part of a pattern of more frequent and severe supply chain disruptions,” said Dan Swan, co-head of McKinsey’s operations practice, referring to trade between the U.S. and China war, the blockage of the Suez Canal last year, and the coronavirus pandemic.

All of these focus on supply chain sovereignty and domestic production facilities. The surge in demand for semiconductors during the pandemic has exposed how the U.S. and Europe’s share of global semiconductor production has fallen from about 80 percent in 1990 to just 20 percent in 2020, prompting massive investment in U.S. semiconductor production.

At the same time, the war in Ukraine has highlighted the dangers of Europe’s dependence on Russian energy exports, especially natural gas.For everything from heavy industry to heating homes, gas prices in Europe have soared to record high In recent weeks, there have been concerns that Russia may reduce supplies in response to Western sanctions. This adds to the pressure to accelerate investment in renewable energy.

Germany vowed on Friday to eliminate Get rid of Russian gas By mid-2024, it said it aims to be “almost independent” from Rosneft by the end of this year.The US has blocked Russian oil imports, while the UK is expected to end of 2022 — Factors that caused crude oil prices to surge above $100 a barrel.

“Three trends that have helped companies generate huge profits over the past 30 years—long-term nominal interest rate trends, corporate tax rates, and globalization—are simultaneously reversing,” said Thomas Friedberger, vice president. Executive at Tikehau Capital, a €34.3 billion alternative asset manager.

“We need to learn to invest again in an inflationary environment,” he said. “It injects diversification into asset prices, compresses multiples and puts pressure on corporate profits. It can only be overcome by asset managers positioning themselves to capitalize on these megatrends: energy transition, cybersecurity and digitalisation. For investors coming That said, it’s going to be a trickier environment.”

However, all of this also presents opportunities for fund managers. “There will be many opportunities for stock pickers because there will be a lot of fragmentation in the industry,” said Monica Defend, head of the Amundi Institute, noting that the energy and defence sectors need to pursue “strategic autonomy” both politically and economically.

Virginie Maisonneuve, global chief information officer at Allianz Global Investors, said the shift will drive innovation, such as linking renewable energy with artificial intelligence to improve efficiency.

“While on the surface it looks very inflationary, it’s sector-by-sector and you have to look at the overall cost and the policies that go with it, which will include fiscal policy or special incentives,” she said. For example, the use of artificial intelligence can reduce costs.

Ultimately, deglobalization represents an opportunity to build a more sustainable economic model, says Tikehau’s Friedberg. “This very globalized economic model where companies, governments and economists seek unlimited short-term growth at all costs to justify high levels of debt and high valuations doesn’t work,” he said.

“It has implications for climate, biodiversity and social inequality. The fact that these crises force us to try to build more sustainable economic models is definitely not necessarily bad news for the world.”