The pandemic has pushed the global supply-chain challenge to the brink. The delay or even the absence of key products has left businesses and consumers scrambling. According to information and statistics gathered, there are two reasons why the supply chain has been challenged: a) changes in consumer behavior (the stimulus programs have shifted spending to more consumer durables via fast e-commerce opportunities), and b) limited industrial capacities to respond to fast-changing developments. Simply expressed, transcontinental production facilities are equipped to respond to mass-markets over a given period of time, and they are limited in adapting in a smart manner to fast-changing consumer trends.
While the former is expected to be of short-term nature, the second one could be a structural long-term concern, and investors are well advised to consider both. Here are some key takeaways:
Precautionary inventory buildup
Amongst others, one particular observation is that companies have moved to a “pull-forward” ordering process. In other words, they have built-up inventories in a precautionary manner. As this phase is about to abate, one would expect that part of the inflationary pressure to abate too.
Transportation bottlenecks
The great resignation wave, i.e., people not returning to their previous jobs, is not only impacting white-collar jobs but also blue-collar opportunities. Even before the pandemic, the transportation industry, which is labor-intensive, was facing a persistent labor shortage. While there is no immediate remedy to the issue, frighteningly higher costs can be expected. Under normal circumstances, these costs would be charged to the consumer. Therefore, all things being equal, that should lead to higher profit margins for the involved companies. Longer-term, near-shoring changes in inventory management and increased automation and insourcing are potential levers. This trend is reflected in IIoT investment opportunities which focus on automation, robotics, 5G, and semiconductors.
Near term, overflight restrictions of Russia and Ukraine add not only another layer of complexity to an already multifaceted routing system but also additional costs and delivery delays.
Dislocated EPS
The combination of easing demand (be it because of inventory restocking or lower consumer demand) and persistent transportation bottlenecks resulting in higher transportation costs are expected to negatively impact EPS expectations for the sectors, i.e., Transportation, Semiconductors, and IT Hardware. On the other hand, EPS improvements are expected to be observed in areas such as car manufacturing, base metals, and data center infrastructure. These sectors are expected to benefit most, as of now, from the oncoming re-insourcing process.