A Changing Landscape
This month’s Editorial by Olivier de Berranger, Deputy Chief Executive Officer and CIO of La Financière de l’Echiquier.
Germany’s foreign trade figures, published in early July, are one of the signs of the ongoing upheaval. For the first time since 1991 and the post-reunification consumption frenzy, Germany posted a net trade deficit of €1 billion in May. On the back of a sharp rise in imports and sluggish exports, this balance reflects the explosion in energy prices, but also the slowdown in foreign demand for products made in Germany. The annualised rise in import prices exceeded 30%, a level not seen since 1974 and the first oil shock.
Clearly, the economic explanation for this is the conflict in Ukraine and the resulting surge in commodity prices—energy in particular. However, deep-seated issues already existed before the conflict. More fundamentally, the inflation regime and trade structure began to disrupt cyclical trends under President Trump, with the trade war with China and the battle against COVID.
Fuelled by strong demand from end consumers, for over 40 years the private sector’s major concern has often been to take advantage of globalisation and global trade to optimise costs and supply chains. This trend accelerated when China—with its labour force and production capacity—joined the WTO in 2001.
Although for a long time this meant lower costs, optimisation may now become more about securing supply chains and resource redundancy. Having just one commodity or intermediate product supplier, or one subcontractor, is no longer reasonable today. Issues surrounding stretched inventory management during COVID and the subsequent recovery had already caused bottlenecks, some of which are still not resolved. The “just in stock” strategy, where companies only have enough stock to fill their shelves, has taken over from “just in time”.
Frozen dollar- and euro-denominated Russian assets and public opinions about withdrawing from an aggressive nation make ensuring redundancy more delicate. Companies certainly want to diversify their suppliers, while also staying within a circle of countries that should remain allies in the event of a conflict. The symmetry of the producer/consumer relationship is also not a given. As we have seen in the case of Russian energy and rare metals, exports can be rerouted fairly quickly.
More than ever, this is pushing us to favour companies with stronger balance sheets during these turbulent times. The ability to stock and finance slightly more inventory without issue, and also secure supply chains, would undoubtedly help businesses to better weather a slowdown of any scale.
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