We talk to wealth managers about how COVID, the terrible events in Ukraine, Western strains with China, and other forces, have created headwinds for globalization - that term describing expanding international trade and interconnections since the fall of the Berlin Wall.

Has COVID and the Russian invasion of Ukraine pushed the world economy and markets into a post-globalization phase?

“I think globalization is in the rear view mirror,” said Robert Brusca, chief economist at FAO Economics in New York. “It began with Trump calling out China for its trade practices, was accelerated by the pandemic and now you have the war in Ukraine. Secure supply lines have become more important than cost.”

Most of the benefits of globalization have been exhausted at present, according to Jack Ablin, founding partner and chief investment officer of Cresset, a Chicago-based RIA.

“Most of the cost benefits on the labor side have been wrung out,” said Ablin, who recently wrote a note to clients detailing the rise of globalization and its current problems. “It’s more of a supply chain issue now. Globalization isn’t over, but the pendulum has now swung back to domestic production.”

Globalization does appear to be retreating for the moment, but supply disruption is the paramount concern, said Adrian Cronje, CEO and chief investment officer for Balentine, an Atlanta-based wealth management firm. “It’s not just about maximizing profits and having goods in time [for markets] anymore,” Cronje explained. “Now it’s about having higher inventories and having goods just in case.”

What are the implications of this new era?

Equities: The combination of supply chain issues, inflation, more interest rate hikes and the possibility of an escalated conflict with Russia means “extreme” risks for equities markets, Brusca argued. “There are too many balls in the air,” he said. “The markets are dancing through a minefield.”

Value stocks will be a big winner and are “poised for a protracted period of out-performance,” Cronje maintained. 

Persistent inflation and rising interest rates have sparked a widening spread between value and growth stocks, he said. What’s more, value stocks, with their longer-term timeline, are more sensitive to rising interest rates because valuations are based on earnings in the future, Cronje noted. By contrast, the shorter duration of value stocks allow investors to receive returns more quickly through dividends and also reinvest sooner.

Investors may want to reconsider their allocations to passive index and exchange-traded funds as threats to global stability increase, said Ablin. Active management that can “anticipate trends and emphasize opportunities” may offer investors a better chance to outperform markets in the turbulent period ahead, he maintained.

Fixed income: Owning fixed income securities is a major risk right now, according to Cronje. “The real potential for stubborn inflation and rising interest rates [have] undermined fixed income’s ability to provide stability and income,” he said.

Balentine is advising clients to have two years' worth of spending needs net of portfolio yield in cash at all times, Cronje said. “You don’t want to have to sell assets at artificially depressed prices.”

Cresset is also wary of over allocating to fixed income at present and believes its diversification benefit “will be diluted,” according to Ablin. The firm is advising clients to “source their real asset inflation protection away from fixed income holdings,” he said. Alternatives include gold, TIPs [Treasury Inflation-Protected Securities] bonds issued by the US government and real estate.

Commodities and alternatives: The war in Ukraine is pushing “a wall of money toward more renewable energy,” Cronje said. “There will be more de-carbonization in a more electrified environment.” 

Long-term, Balentine is advising clients to use private markets to invest in areas like solar fields and infrastructure such as old coal plants that are being converted to produce more sustainable energy. Short-term, Cronje sees public market opportunities in the energy sector.

Because disinflation as a byproduct of globalization “is probably behind us,” Ablin said, Cresset is suggesting that investors add “a real asset component to their portfolio mix.” Examples include commodities and commodity businesses, inflation-protected securities and commercial real estate, which are “natural inflation hedges,” Ablin said.

Emerging markets: World trade is more likely to intensify on an East-West basis between developed countries than on a North-South route between developed countries and emerging markets, Brusca said. 

“There aren’t going to be any problems between Germany and the US,” Brusca added. “But China’s saber-rattling in South China means those countries nearby will be further from a safe place. That may be very good for economies in Latin America and for Mexico that are closer to the US.”

While China’s ability to produce cheap goods for world markets benefited enormously from globalization, that advantage has been mitigated by COVID and a war in Europe sparking supply chain concerns, according to Cronje.

Efficiency, safety and reliability are now top concerns for developed countries, weakening the demand for goods produced in China and developing countries.

Indeed, as trade moves “away from countries we can’t trust, the Russians and Chinas of the world will be net losers,” according to Ablin. Globalization engendered hope, he said, but the world found out that “bad actors are still bad actors.”