What supply chain shifts will mean for global investors

Analysts unpack the mixed implications of ‘reglobalization’ for nations, businesses, and industries

What supply chain shifts will mean for global investors

The weakness of global supply systems, a vulnerability exposed during the COVID-19 epidemic, continues to present a major economic challenge for the world. While that has signalled a death knell for one view of globalization – developed market nations exporting production to lower-cost regions – analysts from Capital Group are seeing it as the start of a new world order.

“[N]ow, companies are recognizing the need to build redundancies into their supply lines, which will have varied impacts on countries, companies and industries,” the analysts wrote in a recent note.

While some have claimed that supply-chain weakness could result in a less globalized world or "deglobalization," the analysts argued it could mark the beginning of a period of "reglobalization," during which more nations will be included in international trade networks and supply chains will be reformed.

Read more: Is the world ready for deglobalization?

“I would expect most companies with a significant percentage of their manufacturing base in Greater China (including Taiwan) to diversify to other countries,” said Noriko Chen, equity portfolio manager.   “The reinvestment in some countries is likely to be positive. But it will also come at a cost to profitability for some companies. However, this should lead to new investing opportunities for those who can identify companies that will benefit from changes in global trade patterns.”

To spread risk, several businesses have moved their production operations to numerous locations throughout the world. The possibility of lessening economic integration does not necessarily follow from this.

As an example, they highlighted the leading producer of cutting-edge semiconductors worldwide, TSMC, which is situated in Taiwan. TSMC is constructing its first production base in the US after concentrating most of its capacity in Taiwan, a hotbed of geopolitical issues. In Japan, it is also building a new semiconductor facility.

Multinationals with a sizable presence in China are likewise searching for the next big chance to connect with consumers abroad, the analysts noted. With a projected 1 billion smartphone users in India by 2026, Apple, which has perhaps established the most remarkable supply chain of any multinational in China, transferred some iPhone manufacture there.

The diversification from China's supply chain will take time for those businesses who are reducing their reliance on China.

Due to a lack of feasible alternatives and the fact that more products created in China will eventually target Chinese consumers, China is expected to continue to play a key role.

Read more: Why China’s dragon economy could still be set to roar

Capital Group stressed that supply-chain shifts will come with near-term financial costs and potential ramifications, such as:

  • Greater levels of corporate spending and higher operating costs.
  • Higher costs for consumers.
  • Due to the costs of adding redundancy and flexibility to supply chains, there are more working capital requirements and operating margin pressure.

“Companies and businesses with pricing power or economies of scale may benefit from this environment, but those without these advantages may face profit margin and earnings pressure and potentially lower valuation multiples,” equity investment director Kent Chan said.

Despite the costs, he also noted a possible long-term payoff of higher valuations for “those companies that are able to diversify sourcing and build greater security and resilience in their supply chain.”