Partner Content: Goldman Sachs Asset Management sponsor of the recent Investment Leaders Summit, discuss why they believe in the benefits of investing in Corporate's and Governments that are key beneficiaries of significant investment in reshoring critical supply chains, ensuring access to key resources, and enhancing national security, over the coming decade.
Why is this a theme to watch?
Geopolitical tensions and the COVID-19 pandemic have underscored the risk of overreliance on select countries for key resources and manufacturing capabilities. As a result, governments and corporations will need to invest heavily in order to ensure their future economic security.
Diversification does not protect an investor from market risk and does not ensure a profit.
We believe there is a great, long-term wealth creation opportunity for clients to invest in companies that are the key beneficiaries of governments and corporates' significant investment in reshoring critical supply chains, ensuring access to key resources, and enhancing national security, over the coming decade. We are particularly excited because of how early we are in this theme.
What is your outlook for the theme as we move into 2024?
We are excited about the outlook for this theme broadly given the global opportunity set and the acceleration of many of these themes due to the geopolitical climate we are facing.
Supply Chain Security
The Covid-19 pandemic has highlighted how fragile and unreliable global supply chains have become. There was no better example than the automotive sector, where it is estimated that nearly 18 million vehicles were removed from production plans as a result of a shortage of semiconductors. Governments have also woken up to this reality and are moving fast to re-shore key elements of the supply chain. The US has announced a $53Bn CHIPS and Science Act and $400Bn Inflation Reduction Act. Europe has announced its own $43B Chips Act. Despite this huge investment, estimates show that between 16-26% of global manufacturing production will move geographies over the next five years. As these multi-year investments to shift supply chains occur, we have identified several key areas of the market that will be the primary beneficiaries.
Last year reminded us that no economy can deliver sustainable growth without access to vital materials and commodities, and in particular, cheap and reliable energy. The importance of energy security will be profound over the next decade and we see beneficiaries in both traditional as well as alternative sources. Energy supply chains will be re-mapped with North American producers and the associated infrastructure poised to benefit, as they replace supplies from more volatile areas.
Overall we think that the next few years will offer exciting and diverse investment opportunities in the broader commodity complex and more specifically in the energy sector that will continue to both grow organically as well as innovate and expand to new technologies.
As security threats continue to grow in magnitude and complexity, we believe countries will continue to focus on enhancing their national security. Since 2017, US defense spending has increased by approximately 25%, driven first by trade and tariff restrictions with China, and more recently by the Russia-Ukraine conflict. The 2023 US defense budget includes $130B for R&D - an all-time high. We are finding interesting investment opportunities in traditional defence names, as well as in companies developing the latest electronics, cybersecurity and space technologies.
Data as of 30 September 2023
Can you identify a couple of key investment opportunities at a sector or thematic level?
Within our Supply Chain security theme, we expect 2024 investments to accelerate as stimulus starts to get released. Governments and corporations are continuing to accelerate investment in order to secure key elements of the supply chain. According to Eaton, in the U.S. and Canada alone, there have been nearly $600B of new mega projects announced since January 2021. This would represent ~3x the normal run-rate of investment. While some of these investments have started (Eaton estimates ~25% of projects have started to break ground), we think the vast majority of these investments will begin in 2024 and believe investors need to get positioned ahead of this fundamental acceleration. The biggest driver of the 2024 acceleration will be the release of stimulus dollars from US legislation including the Inflation Reduction Act, Chips Act and Infrastructure Investment and Jobs Act.
In addition to the investments that are happening in the U.S., infrastructure investments are accelerating around the world. For example, in India, mobile phones now account for 21.5% of domestic India electronics demand and the Indian government is looking to bring more of this production onshore. Europe is taking action to prevent falling further behind the rest of the world on Net-Zero technologies. To address this, Europe recently launched its own Green Deal Industrial Plan. In Mexico, nearshoring is likely to boost the economy significantly. Mexico has taken a greater share of U.S. imports in recent months, but in order to get more of the full benefits of near-shoring, the country needs to invest more in infrastructure and energy.