Investment Opportunities in Shifting Supply Chains
Companies across industries have struggled in recent years with breakdowns in the global supply chain, leaving them vulnerable to lost opportunities. As a result, some U.S. companies are considering whether to shift jobs, processes and sourcing back home. Such “reshoring” efforts may require significant new capital investment and could lead to unique opportunities for investors over the next decade. Why Are Some U.S. Companies Reshoring Supply Chains? Globalization was one of the predominant economic megatrends of the late 20 th century—one that many people thought would move inexorably forward, creating an ever-more interconnected world. But since the 2000s, as U.S. income inequality levels have grown since the 1960s 1 , domestic perceptions of offshore manufacturing started to change, spurring policy support for reshoring efforts. Over time, geopolitical shifts, such as increased foreign investment reviews and heightened sensitivity around national security issues in technology, have begun to help slow globalization . And developments in recent years—including pandemic-related shipping woes, the Russia-Ukraine war and ongoing U.S.-China trade strife—have only further exposed the vulnerabilities of global supply chains. These shifts are driving governments and companies to move production to nearby countries, economic allies or even their own shores. In the U.S., public policy aimed at reducing reliance on foreign economies and bolstering national security is providing impetus to reshoring. Recently passed legislation, for example, allocates more than $100 billion to boost the domestic production of semiconductors—a key electronic component in everything from cars to cell phones to computers. What Are the Obstacles to U.S. Reshoring? There are potential impediments to this trend. First, the global supply chain itself is extremely large and interconnected. Reorganizing it will be costly and time-consuming. Fully reshoring certain industries may be impossible; however, “friend-shoring”—or moving production to economic allies—may be a more feasible option in some cases. Additionally, some corporate leaders may not see an urgent need to move operations back home. A report by Michael Zezas, Morgan Stanley’s head of U.S. Public Policy Research and Municipal Credit Strategy, found that 42% of Morgan Stanley sector analysts believe the industries they cover need to secure supply chains faster than other industries. Furthermore, 58% of management teams at their covered companies are only somewhat—or not at all—receptive to such changes. Only 4% of North American management teams are highly receptive. How Can Investors Benefit From This Trend? Morgan Stanley’s Global Investment Committee believes small shifts over time toward a more domestically oriented manufacturing economy could provide long-term opportunities for investors. Two potential beneficiaries of U.S. policy support and capital investment deserve particular consideration: Semiconductor manufacturing has been a clear policy focus in Washington amid national security and geopolitical concerns. The America COMPETES Act, for example, allocates $52 billion to manufacturing and research for semiconductors. Companies that are part of the semiconductor supply chain or that directly produce semiconductors could see sustainable revenue growth. Domestic renewable energy will likely play an important role in energy security as U.S. policymakers seek to mitigate reliance on foreign energy suppliers. A recent example of public policy support for this shift is the Inflation Reduction Act, which allocates $60 billion for clean energy manufacturing, including domestic production of solar panels, wind turbines and batteries. In addition, we see opportunities tied to the need to expand infrastructure and reduce costs if supply chains return to the U.S.: Ground transportation: If domestic production and distribution expand, look for U.S. freight and trucking providers to benefit from a growing need to move goods between U.S. hubs. Industrial real estate: Real estate investment trusts (REITs) that operate data centers and industrial properties could see growth amid increased demand for sites for computing and manufacturing. Automation hardware and software: These technology providers stand to benefit as companies seek to automate processes, increasing production and reducing the costs of labor and capital . Interested in learning more? Ask your Morgan Stanley Financial Advisor for a copy of our AlphaCurrents report, Opportunities Around Reshoring and Shifting Supply Chains, which includes specific stock and fund recommendations tied to reshoring. Your Financial Advisor can help you understand your portfolio might benefit from investing in the potential beneficiaries of this trend.
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