A series of leading fund managers believe the trend towards onshoring and nearshoring production back from emerging to developed markets has much further to go.
Onshoring is being driven by a combination of factors, not least rising wage inflation and declining competitiveness in emerging markets, while a number of developed nations are also benefiting from more competitive labour costs.
The US can also boast of falling energy prices, driven by the shale revolution, creating a renaissance in the its manufacturing sector. Mexico is a key beneficiary of this due to its proximity to the US and its well-educated workforce.
It is a trend that Sarasin & Partners feels so strongly about that it has introduced a new investment theme entitled ‘Going Glocal’, seeking the net beneficiaries of manufacturing relocated closer to end markets.
Chief economist Subitha Subramaniam explained: ‘This is not an end or a reversal of globalisation. It is a more subtle shift where you are trying to put supply closer to demand.’
She attributes the trend to a growing desire among corporates to have research and development and manufacturing closer to each other and to local markets. She also highlights tax incentives that make the exercise more attractive for firms.
Sarasin expects nearshoring and onshoring to accelerate as China transitions to a consumption-driven economy with more localised production.
Shorter supply chains
Citywire AAA-rated Ian Heslop, manager of the Old Mutual Global Equity and North American Equity funds, points to the well-educated and flexible US workforce, coupled with the desire to shorten supply chains and make them less complicated, as drivers.
‘It always makes sense to build in the US and not offshore if your costs are similar. It is something that will continue. Although there will always be certain niche products that are better done offshore than onshore, onshore has shown itself to be resilient,’ he explained.
He points to estimates that onshoring projects have generated between 250,000 and 500,000 jobs in the US, with the obvious multiplier effect of rising employment trickling through the economy.
Onshoring is a trend that A-rated Stephen Thornber is playing through his Threadneedle Global Equity Income fund . He cites Canadian ethanol producer Methanex’s decision to physically move a plant from Chile to Louisiana in the US as a clear example of the attractions of much cheaper natural gas on the back of shale gas discoveries.
‘And you have got the long-term security of [natural gas] supply and getting manufacturing in a stable and well-regulated and organised market,’ he added.
The fund manager highlights the multiplier effect of onshoring at a capex level, as it encourages companies to invest in plants and people domestically. He anticipates that construction companies and contractors can benefit from the first stage of capital investment in infrastructure. He also highlights railways, such as Union Pacific, which can benefit from hauling shale energy across the US.
Closer to home others are tipping the UK as another area that stands to benefit from the trend. Henderson UK Equity Income manager James Henderson, who is AA-rated, expects capital spend in the UK to pick up, buoyed by a competitive currency and a lack of wage inflation.
‘Top line and sales are growing but wages have not increased. You have got the benefit of a more competitive currency and a cost line that is not moving up sharply, leading to growing operating margins and improved cashflow,’ he explained.
Source Article from http://citywire.co.uk/wealth-manager/is-it-time-to-play-the-nearshoring-boom/a697719
