Megatrends: Reshoring supply chains could offer these investment opportunities

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 US 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 potential opportunities for investors over the next decade.

Globalization was one of the predominant economic megatrends of the last century, but over time, geopolitical shifts and heightened sensitivity around national security issues in technology, have begun to help slow globalization.

What’s more, recent developments like pandemic-related shipping woes, the Russia-Ukraine war, and ongoing US-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 US, public policy aimed at reducing reliance on foreign economies and bolstering national security is providing incentives 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.

There are some potential obstacles 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 US Public Policy Research and Municipal Credit Strategy, found that 42% of Morgan Stanley Research sector analysts believe the industries they cover need to secure supply chains faster than other industries. However, 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.

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 US 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 US 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, Morgan Stanley Wealth Management sees potential investment opportunities tied to the need to expand infrastructure and reduce costs if supply chains return to the US:

• Ground transportation: If domestic production and distribution expand, look for US freight and trucking providers to benefit from a growing need to move goods between US 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.

When considering which of these investments may fit into your portfolio, always be sure to keep in mind individual goals, timelines, and risk tolerance.

The source of this article, “Investment Opportunities in Shifting Supply Chains,” was originally published on April 19, 2023.