Over the last three decades, globalisation has acted as a powerful disinflationary force. Supply chains went global with manufacturing moving East to low-cost geographies, and declining trade barriers helped contain goods inflation across developed market economies. That regime is now over. Deglobalisation has become a tangible macroeconomic force with clear inflationary consequences.
Deglobalisation is accelerating
Initially, under President Trump’s first term, the trade spat between the US and China that began in 2018 pushed up tariffs, driving input costs higher and feeding into consumer prices over time. To the large American consumer market, China became a less cheap manufacturing hub resulting in the evolution of supply chains as businesses began shifting production to other locations.
The 2020 COVID-19 pandemic transformed what had been a policy choice into a practicality. Shipping bottlenecks, semiconductor shortages and energy dislocations created a sharp and synchronised global inflation shock. Companies had to move from ‘Just In Time’ supply to ‘Just In Case’, adding storage costs and inventory obsolescence risks.
More recently, geopolitical escalation has reinforced these dynamics. Russia’s invasion of Ukraine triggered energy and food price surges, while renewed tariff actions by the US coupled with their industrial policy, particularly in strategic sectors such as energy security and defence, have raised the costs for traded goods. The recent Middle East crisis has accelerated the deglobalisation theme further.
A series of recent shocks has underscored Europe’s exposure to supply disruptions, highlighting the region’s reliance on external production and global supply chains. This underlines the growing need for a more self-sufficient and resilient industrial policy framework.
What does deglobalisation mean for economies?
As a reminder deglobalisation can add to inflation through several reinforcing factors. Higher costs arise because of reshoring, nearshoring and friend shoring as production moves to locations with higher labour and capital expense than less regulated geographies.
Deglobalisation also implies that companies end up with fragmented supply chains which can result in lower economies of scale leading to higher costs for companies and consequently consumers.
Where do we go from here?
Strategic decoupling, industrial subsidies and national security considerations are rewiring capital allocation and supply chains. This implies structurally higher inflation than we saw in the previous decade. Therefore, inflation will likely be more persistent and more sensitive to geopolitical shocks.
In this environment, central banks face a complex trade off. Supply driven inflation is generally less responsive to demand destruction, while tighter policy risks undercutting investment precisely where economies are attempting to rebuild capacity. Deglobalisation without huge investment can increase the likelihood of slowing growth, and consequently stagflation – the central bankers worst nightmare.
As investors, the implication is clear: deglobalisation is a macro regime shift. History has demonstrated that in times where inflation is persistent, bonds and equities typically become more positively correlated. In these times, duration for investors as a hedge loses its utility.
How we invest in Fixed Income
When short end rates offer positive real returns in developed markets, there is no need to take on a great deal of duration. If you add on the credit spread of short-dated investment grade, you can get a lower volatility and a strongly positive real return. In times of such large geopolitical changes, you don’t need to over think it. Duration isn’t giving you the hedge it previously did. Compounding short-dated returns gives the ballast on which to build portfolios.
In the Premier Miton Strategic Monthly Income Bond fund, we are doing exactly that, keeping duration low and compounding up the yield at the short end. Coupled with our activity in the fixed income market we look to provide a low volatility outcome and a strongly positive real return.
