The rise in global geopolitical risk and the exposure of supply chain vulnerabilities uncovered by the COVID-19 pandemic has U.S. corporate America rethinking its approach to off-shore manufacturing.
In this latest edition of LPL Street View, LPL Chief Investment Officer and Director of Research Marc Zabicki takes a brief look at the concepts of reshoring and nearshoring, two efforts some U.S. corporations are taking on to reduce risks associated with bringing products to market.
Reshoring is the concept of bringing manufacturing activity back on to U.S. soil in an effort to reduce rising production and supply chain vulnerabilities in places such as China and other countries with volatile political, financial, and regulatory landscapes.
Nearshoring is a similar effort in that manufacturing activity is brought closer to the U.S., but production may still reside in countries that represent lower costs of production.
Management teams in U.S. industries, such as semiconductors, steel/aluminum, automotive, medical devices, and appliances, have taken recent steps to reshore or nearshore production activity.
The question is who are the key winners here, and where can you invest to take advantage of this prevailing trend?
We believe Latin American countries may be a logical place for ongoing investment. If one is considering redirecting manufacturing activity from one location to another, our first choice in Latin America may be Mexico. Foreign direct investment in Mexico continues to trend in a positive direction; total manufacturing costs are some of the lowest in the world, and the economic, political, and financial risks in Mexico are more palatable than in other countries. While we are still cautious on emerging markets overall, we believe Mexico’s equity market may be showing signs of life based on the nearshoring trend.
Finally, we think U.S. industrial companies will be key winners in the reshoring trend, and the industrials sector is the segment we tactically favor at this time. Why? Because many U.S. industrial companies are being and will be employed to build new infrastructure. U.S. companies are expected to boost capex by 6% in 2023, following a 20% gain in 2022. We believe this should provide a tailwind for industrials stocks. Over a trillion dollars in U.S. government spending on the infrastructure reshoring effort certainly helps as well.
