The Unwinding Of Global Supply Chains In The Face Of Protectionism Has Significant Long-term Inflationary Implications
Like other global sectors, the technology sector has over time built extended global supply chains whereby components and services are procured at the highest quality and lowest price made available by an open global economy. Consumers have benefitted from these economies of scale to enjoy innovative products (e.g. smartphones) at relatively low prices. The same point can be made relative to goods procured and distributed by companies such as Walmart (WMT). Protectionist strategies such as “America First” that rely heavily on punitive tariffs and seek to undermine multilateral trade arrangements in favor of replacement by a range of bilateral agreements serve only to complicate business for companies seeking to provide the best value for consumers. The net effect of undermining economies of scale and imposing competing standards is to raise costs for businesses and prices for consumers. Important to remember that tariffs are implemented by raising prices to U.S. consumers, not foreign producers. The wages of protectionism are ultimately inflation. Trump’s protectionist presidential edict of “America First” promises to drag the global economy into a slower growth, higher inflation paradigm as economies of scale previously achieved are unwound in the face of markets made smaller by protectionism’s rising walls. Consequently, investors should expect greater market volatility ahead as the tech sector and others are forced to dance through the Trumpian minefield of unintended consequences.
In Crisis, What Investment Opportunities Or Safe Havens Emerge? Three Names To Consider – AMZN, MSFT, NFLX
While for the broader stockmarket the implications of a slower growth, higher inflation global paradigm will be lower P/E valuation levels, within the tech sector the brunt of the current Trump trade war costs will fall on those companies most reliant on China-based suppliers. Nevertheless, as market P/E valuation levels normalize around the transition to the slower growth, higher inflation global economic paradigm, there are tech names that are not as supply chain-exposed that investors may wish to consider: AMZN, MSFT & NFLX. Amazon (AMZN) remains a pre-eminent e-commerce company which has multiple emerging growth opportunities (e.g. Alexa, internet advertising, Whole Foods). Microsoft (MSFT) benefits from the continued shift towards cloud-based computing and other technology franchises that are relied on daily. Netflix (NFLX) has established itself as the pre-eminent video-streaming franchise with increasing success in content creation which should provide solid momentum into 2019.