Rampant inflation has reduced the attraction of paper assets, while physical assets are benefiting from the rise in prices as well as deglobalisation.

Globalisation has been in retreat for many years, even before Donald Trump created his trade war with China. During his presidency, the Standard Bank argued that deglobalisation, along with adverse demographic trends would likely lead to higher inflation. When COVID struck, deglobalisation went into overdrive as blocked supply chains focused the minds of firms and policymakers on reshoring, or at least sourcing key inputs from ‘reliable’ sources. All the while, policymakers around the world got heavily into the business of trying to monopolise the supply of key necessities. Products such as PPE (personal protection equipment) were fought over in the early days of the pandemic, and then, later, this switched to securing vaccines. Through all of this, the mindset of policymakers, and we dare say those in the private sector, seemingly changed from championing the import of cheap products and services from far-flung corners of the world to a much greater home bias.

There may have been hope that the global recovery from the pandemic would see this type of protectionist behavior put back in its box again. But the Russia/Ukraine conflict has stopped any such thoughts. The scramble now is not for PPE or vaccines but for non-Russian energy and more. Many countries, such as the UK, are talking about firing up their own energy-producing resources again, even if this goes against the spirit, if not the letter, of the COP 26 agreement from last year. The danger from here is that the world could move into some sort of dystopian Mad Max world in which countries try to use their muscle to obtain essential supplies, particularly in the areas of food and energy, with prices spiralling dramatically higher as a result.

There are already signs that some such markets are becoming dysfunctional due to soaring prices. Yesterday’s surge in nickel, where prices temporarily more than doubled in one day before trading was cancelled out by the LME, may be another glimpse of how markets for certain products could develop in this dystopian future.

This might appear extreme, but the fact that this deglobalisation has helped spurn much higher inflation only serves to create this air of panic. For now, the balance of inflation has shifted, as we argued it would some time ago. It has shifted from asset inflation to inflation in goods and services.

For decades inflation was only in assets such as stocks and bonds not the CPI because globalisation meant the ample supply of goods and services (as opposed to bonds and stocks which are in relatively short supply – especially when central banks are conducting quantitative easing). But now, with globalisation retreating and QE ending, the boot is on the other foot. Investors want to own something they can touch, like wheat, energy, nickel and more, not a paper asset on a computer screen. Rampant inflation has reduced the attraction of paper assets, while physical assets are benefiting from the rise in prices as well as deglobalisation.

In Mr. Steve Barrow, Head of Standard Bank G10 Strategy’s view, the danger is that the fervor for real assets mirrors the sorts of strong demand that we’ve seen for paper assets in the past, particularly when central banks have been conducting QE. If it does, the surge in commodity prices may be far more dramatic than we have seen so far because demand could be driven not just by fears about the security of supply, but also because investors see commodities as the best way to protect themselves in a high-inflation world. Of course, investors will try to ride this trend through paper assets as well, by accumulating stocks of commodity-producing companies, for instance, but this may only mean holding the best stock sector within a bad asset class.