National Security: An Increasingly Key Driver of Global Economies

Marc Zabicki (00:00):

If you skim through the pages of our latest LPL Research Midyear Outlook, you'll come across an important section of the report that deals with a subject we call resource nationalism. In this latest edition of LPL Street View, we wanted to provide some introduction into the subject of resource nationalism, define it a bit, and then suggest how and why it may represent a key theme for investors over the coming years. For decades, investors evaluated supply chains, manufacturing footprints, commodity exposure, and country allocations primarily through an economic lens. The key questions were straightforward. Where can goods be produced most efficiently? Which regions offer the lowest costs? How can companies optimize margins and maximize returns? Today those questions remain certainly important, but they're increasingly being supplemented and sometimes overshadowed by a new consideration - national security. And national security has been the cause for some retrenchment on globalism and government moves to control more of the means of production.

Marc Zabicki (01:16):

By definition, resource nationalism. Recent geopolitical developments, trade disputes, export controls, and industrial policies have highlighted the vulnerabilities created by highly concentrated global supply chains. Investors are increasingly recognizing that efficiency and resilience are not always synonymous. A supply chain that appears economically optimal can become a significant liability if geopolitical tensions, tariffs, sanctions, or other transportation disruptions suddenly limit access to critical inputs. Both COVID and the recent shutdown of the Strait of Hormuz have shed considerable light on this growing concern. This shift is particularly evident in sectors tied to strategic industries. Semiconductor manufacturing, rare earth minerals, energy infrastructure, pharmaceuticals, and advanced technologies are now viewed as assets with national security implications rather than purely commercial products. Governments around the world are encouraging domestic production, reshoring critical industries, and diversifying supply resources. In response, investors are reassessing which companies are best positioned for a world where resilience may command a premium

Marc Zabicki (02:40):

over efficiency. Country allocation decisions are changing as well. Historically, investors focused heavily on growth prospects, valuations, demographics, and monetary policy. While those factors still matter, investors are increasingly evaluating political alignment, trade relationships, access to strategic resources and supply chain importance. Countries that serve as trusted manufacturing hubs or possess critical commodities may attract greater capital than traditional economic models alone would suggest. The ramifications we believe are significant. First, inflation may remain structurally higher than in the pre-pandemic era. Building redundant supply chains, maintaining larger inventories, and relocating production closer to end markets can improve resilience, but often increase costs. Those higher costs may ultimately be passed on to consumers or absorbed by an increased corporate push toward technical efficiencies. Second, capital spending is likely to remain elevated. Governments and corporations are investing heavily in domestic manufacturing, energy independence, logistics, and technology infrastructure. We believe this trend could create attractive long-term opportunities in industrials, infrastructure, automation, and critical resource sectors.

Marc Zabicki (04:16):

Third, market leadership may become more geographically dispersed as companies diversify production away from a single region new manufacturing centers and commodity producing nations could emerge as important beneficiaries of global capital flows. For us, economies in Latin America could be major allies for a U.S. economy that is trying to bring the means of production closer to home. So, for an investor, what should you watch for? Ultimately, we believe investors will need to adapt to a world in which national security and economic policy are increasingly intertwined. The winners of the next decade may not simply be the lowest cost producers in far away lands, but the firms, industries, and countries that provide reliability, closer proximity, strategic value, and resilience in an increasingly fragmented global economy. Thanks for listening, and as always, and allocate wisely.