Is reshoring the theme ETF investors need?
BlackRock named reshoring the main theme to watch in 2023 If thematic investing is about capturing structural shifts, then surely there ought to be an ETF targeting the reversal of the biggest economic event of the last century, via reshoring. From post-WW2 alliance building to Bretton Woods, China’s ‘Great Leap Forward’ to the fall of the Berlin Wall and the IMF’s Structural Adjustment Programmes, the half-century construction of a global economic order is the miracle that has padded companies’ margins, supported consumer habits and opened up global opportunities for trade and investment. However, our certainty in a Fukuyama-esque ‘end of history’ scenario has been rocked over the past decade, with Russia’s invasion of Crimea in 2014, escalation of US-China sanctions and a general shift towards populist isolationist politics in the west. These events set the stage for the reshoring narrative to come of age during what historian Alan Tooze termed the ‘polycrisis’ that followed COVID-19. This started with supply chains being strained or completely overhauled by lockdowns and vaccine rollouts, before Russia’s invasion of Ukraine and China subsequently ramping up its Taiwan rhetoric placed a tangible question mark over the merits of global interdependence. Far from a passing fancy among economists and journalists, the world’s largest asset manager, BlackRock , named reshoring its top theme to watch in its Thematic Outlook 2023 , amid the convergence of demographic, technological and geopolitical change. “Countries and businesses increasingly recognise the importance of more resilient supply chains as geopolitics potentially impacts key resources,” BlackRock said. “Businesses and policymakers have been working on creating more opportunities at home while remaining connected to the global economy.” This theme also has statistical backing, as seen in a dedicated Société Générale Cross Asset Research paper, which estimates as many as 350,000 new jobs were created in the US last year because of reshored manufacturing. Chart 1: Number of jobs announced arising from reshoring and foreign direct investment Source: SocGen Cross Asset Research, Reshoring Initiative Interestingly, reshoring has also become more of a front-of-mind issue for companies over the past year than it was even during peak COVID-19 uncertainty in 2020. In mid-2022, reshoring, onshoring or nearshoring were mentioned in the quarterly earnings calls of around 180 US companies. Chart 2: Mentions of onshoring and reshoring have increased in company earnings calls Source: SocGen Cross Asset Research, Bloomberg Whether convinced by the reshoring argument or not, investors should at least be mindful that companies are looking closer to home. Job reshoring is gathering pace while the share of the global economy made up by international trade is moving consistently downward at a pace not seen in at least five decades. Chart 3: US reshoring job announcements per year Source: Wall Street Journal, BlackRock Chart 4: Global trade as a percentage of GDP Investable reshoring opportunities for ETFs Interestingly, while reshoring has only recently come into vogue in the mainstream, there have been ETFs looking to capitalise on the theme for years including the First Trust RBA American Industrial Renaissance ETF (AIRR). Having launched in 2014 and tracking the Richard Bernstein Advisors American Industrial Renaissance index, AIRR captures 49 US industrial and related infrastructure companies deriving no more than 25% of their revenues from outside of the US, as well as domestically-focused banks based in states considered ‘manufacturing hubs’. As part of its research, SocGen also created an investable US onshoring index of 28 stocks including industrial REIT Prologis, rail freight company Union Pacific, industrial firm Honeywell and defence specialist Raytheon Technologies. Outside of manufacturing, there are other, existing ETF themes that stand to benefit from the broader strategic shift to reshoring all parts of countries’ overseas dependencies. One example is the dozens of clean energy ETFs and tens of billions of dollars tracking them. As gas prices hit 15-year highs following the invasion of Ukraine last year, the US committed $369bn via the Inflation Reduction Act and the EU €210bn through RePowerEU to investments and tax credits for expanding domestic clean energy capacity. Over the past 12 months, the $6.1bn iShares Global Clean Energy UCITS ETF (INRG) posted some of the strongest returns of any Europe-listed thematic ETF, up 14.5%. In 2022, wind and solar combined accounted for a greater portion of EU power generation than gas for the first time ever, according to energy think-tank Ember. Chart 5: EU power generation from wind and solar surpassed gas for the first time Source: Ember A second direct beneficiary could be semiconductor ETFs, which are exposed to a […]
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