Much has been made of reshoring as companies look to bring manufacturing back to their home countries, especially the US. However, the rise is just beginning, experts believe, so the potential for the trend to boost stock values has yet to be fully exploited. Reshoring is essentially companies returning operations to their home country from abroad. Supply chain security, a strong US dollar and government incentives are among the reasons for the increase, said Brian Belski, chief investment strategist at BMO Capital Markets. “The reshoring craze is real, especially as you continue to hear more and more about this general theme of deglobalization,” he said. “It’s a trend that will accelerate, especially in the first part of the year,” he added. “The US has learned its lesson during Covid and the lockdown and breakdown of supply chains.” Rehoring and foreign direct investment are expected to create a record 350,000 US jobs in 2022, according to the Reshoring Initiative, an advocacy group that tracks manufacturing jobs and foreign investment. Third-quarter company announcements are up 20% from the second quarter and 150% from 2019, UBS analyst Chris Snyder wrote in a November note. He pointed to China’s Covid-zero policy and the European energy crisis as two major drivers. “As China’s Covid zero drags on, they are closing, but we are fully reopening,” Snyder told CNBC. “It’s very difficult for a company or a multinational to have its point of supply and its point of demand operating on very different playing fields, and that makes the supply chain very difficult to operate.” About 87% of US executives with operations in China plan to move production out of the country and about 70% of them are considering the US as a place to relax, according to a survey by UBS Evidence Lab. The online survey ran from June 10 to July 7 and surveyed 450 senior executives across the US. Even Apple is pulling away from China, said tech investor Gene Munster. Of the 150 new manufacturing sites added in 2021, 79% are outside mainland China and 24 of those 150 are in the US, he said. “For Apple, it’s more about getting out of China than getting into the United States,” said Munster, founder and managing partner of Loop Ventures. The company intends to shift production to India and Vietnam, The Wall Street Journal reported earlier this month. However, it’s semiconductor, automobile and tech hardware companies that are leading the way, according to Snyder. Chipmakers’ reshoring announcements were up 500% in Q3 from Q2, while autos were up 100% and tech hardware was up 45%. To lure semiconductor manufacturing back to the US, President Joe Biden signed the Chips and Science Act into law in August. It includes more than $52 billion for US companies that make computer chips and billions more in tax credits. ‘Best way forward’ Businesses will continue to focus on improving operational efficiency, reducing costs, preserving cash and sustaining earnings growth – and North America will provide a safe haven, BMO’s Belski said in a note dated 8 December. “We think that supply chains will not only move closer to home, but will also evolve, as there is no longer a ‘one size fits all’ solution in the face of severe disruptions, but rather a ‘best way forward’ as opposed to the usual ‘cheapest way forward’ next,'” he wrote. He hopes that sectors that produce products essential for national security – and therefore will be potential beneficiaries of various government incentives – will be well positioned to benefit from reshoring. These sectors are industrials, materials, healthcare, technology, and consumer discretionary goods. Among the stocks he believes will benefit are those that will help build new plant and equipment, such as AGCO, Illinois Tool Works, Dupont and Freeport-McMoRan. BMO owns all of these companies. 2023 on ‘derivative games’ Automation is an obvious beneficiary of reshoring, but this is a theme that already exists and has been invested in since 2020, said UBS’s Snyder. This includes the likes of Emerson Electric and Rockwell Automation. Instead, he thinks 2023 will be about underrated derivative plays. “Some of the electric names are really underrated beneficiaries because they have so many touch points throughout the process,” he said. “You need to buy electrical products when you’re building a factory. You need to buy electrical products when you’re building that factory’s equipment. When you’re connecting the grid to that factory, you need electrical components.” The best player on this topic is energy management company Eaton, Snyder said. “They sell on the network. You have to build the network when you get factories online,” he said. “They sell to factory construction, they sell to factory equipment, factory automation.” Keysight Technologies, which provides electronic design and testing solutions, is also an interesting match, he said. The company’s equipment is necessary for large semiconductor factories, as companies test chips as they are produced, Snyder said. “As we’re seeing this huge increase in semi capacity, that’s driving demand for Keysight test equipment,” he said. TE Connectivity and Amphenol are two more names he mentioned. Both have exposure to automation and electric vehicles. Both play autos, which is one of the best end markets for reshoring, he said. “When you build the new auto production facility, your automation business makes money. Auto is the most automated industrial end market,” Snyder said. “So they have big EV deals that get paid once construction is complete.” —Michael Bloom of CNBC contributed reporting.
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