The war in Ukraine will worsen global inflationary pressures as companies withdraw from their already vulnerable global supply chains, BlackRock’s Larry Fink has warned.
The chairman and chief executive of the world’s largest asset manager said that inflation will likely persist as companies look to onshore or nearshore more of their operations.
“The Russian invasion of Ukraine has put an end to the globalisation we have experienced over the past three decades,” he said in his annual chairman’s letter to shareholders of BlackRock.
“Russia’s aggression in Ukraine and its subsequent decoupling from the global economy is going to prompt companies and governments worldwide to re-evaluate their dependencies and re-analyze their manufacturing and assembly footprints – something that Covid had already spurred many to start doing.”
While the coronavirus pandemic initially strained globalisation – a process that has enabled persistently low inflation over the past decade – Fink warned that the conflict in Ukraine will spark companies and governments to look more broadly at their dependencies on other nations.
“This may lead companies to onshore or nearshore more of their operations, resulting in a faster pull back from some countries,” he said. “This decoupling will inevitably create challenges for companies, including higher costs and margin pressures.
“While companies’ and consumers’ balance sheets are strong today, giving them more of a cushion to weather these difficulties, a large-scale reorientation of supply chains will inherently be inflationary.”
Prices have already been rising at a record pace – hitting the highest figures seen in decades with 6.2% inflation in the UK, 5.9% in Europe and 7.9% in the US.
Worryingly, these figures still do not yet reflect the supply chain pressures caused by the war in Ukraine.
This means that central banks now must weigh difficult decisions about how fast to raise interest rates, Fink said.
“They face a dilemma they haven’t faced in decades, which has been worsened by geopolitical conflict and the resulting energy shocks,” he said.
“Central banks must choose whether to live with higher inflation or slow economic activity and employment to lower inflation quickly.”
Although the immediate effect of the war in Ukraine has been a shock to commodities and energy prices, Fink predicted that it will ultimately accelerate the transition to clean energy.
In his view, investors need to prepare for the impact that deglobalisation, inflation and the energy transition will have on companies, valuations and investment portfolios.
He said: “Longer-term, I believe that recent events will actually accelerate the shift toward greener sources of energy in many parts of the world.
“During the pandemic, we saw how a crisis can act as a catalyst for innovation. Businesses, governments, and scientists came together to develop and deploy vaccines at scale in record time.”
He highlighted European policy makers’ intentions to invest more into renewable energy to further secure their energy security.
“Germany, for example, plans to accelerate its use of renewable energy and reach 100% clean power by 2035, 15 years ahead of its previous pre-war target,” he said.
“More than ever, countries that don’t have their own energy sources will need to fund and develop them – which for many will mean investing in wind and solar power.”
Fink also foresees that higher energy prices will meaningfully reduce the green premium for clean technologies – enabling renewables, electric vehicles and other clean technologies to be more competitive economically.
“However, energy prices at this level are also imposing a terrible burden on those people who can least afford it,” he added. “We will not have a fair and just energy transition if they remain at these levels.”
Oil prices have surged over 123% over the past year as global economies re-opened after being largely shut during the pandemic.
Bloomberg WTI Crude Oil Sub index over 1yr
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Source: FE Analytics
Fink called on public policy makers to take a more holistic and long-term approach to the world’s energy needs.
He said: “Among other challenges, as demand for renewable sources of energy and use of clean technology increases, we must consider what this means for the underlying commodities on which these green sources of energy and technology depend.
“We will also need to accelerate infrastructure investments to support greater use of clean energy and technology.”
As consumer demand for electric vehicles accelerates, he said that both the public and private sector will need to work together to build more charging stations to meet this demand.
Although BlackRock has drawn criticism from activists for not divesting completely from fossil fuels, Fink argued the importance of continuing to work with hydrocarbon companies, who play “an essential role in the economy today and will in any successful transition”.
“To ensure the continuity of affordable energy prices during the transition, fossil fuels like natural gas will be important as a transition fuel,” he said.
“BlackRock’s investments – including one late last year – in natural gas pipelines in the Middle East are a great example of helping countries go from dark brown to lighter brown as these Gulf nations use less oil for power production and substitute it with a cleaner base fuel like natural gas.
“In the transition to net zero we will need to pass through many shades of brown to shades of green.”