From Morgan Stanley
Global supply chains have been pushed to the brink over the last two years, revealing the shortcomings of a complicated system that impacts everything from computer chips to toilet paper. These supply chain delays don’t just affect daily life — they reverberate across the global economy.
But while supply chains do remain fragile, serious constraints may be more fleeting than many investors are forecasting.
“The most important trigger of supply chain disruptions, in our view, has been a surge in demand for physical goods as a result of record stimulus programs and a sharp shift in spending from services to consumer durables,” says Michael Zezas, Head of Public Policy Research and Municipal Strategy for Morgan Stanley. As demand normalizes, he says, so too should the production and movement of physical goods.
With a recent collaborative Bluepaper from Morgan Stanley Research, Zezas and his colleagues kicked off an ongoing series that looks at the specific causes, implications and trajectories of supply chain disruptions.
Broadly speaking, Zezas and team think production issues for most industries should ease over the course of 2022 and revert to normal by the end of the year.
That said, it’s critical that investors distinguish the long-term structural factors choking supply chains from the issues that are only temporary. With the launch of the new series, analysts and strategists identified 13 primary chokepoints impacting companies today.
They expect this list to evolve over the coming months as demand and supply shocks continue to ripple through various product segments, and the team is continuously updating their coverage to reflect these changes.
Here are three key takeaways:
1. Demand surges triggered disruptions
Several factors have hampered supply chains over the last two years, including COVID-related production issues, broad-based labor supply challenges, and the “bullwhip effects” of pull-forward ordering and precautionary inventory buildup.
Yet, the single largest culprit has been the unexpected and unprecedented surge in demand for goods.
A sharp but short-lived decline in demand early in the pandemic prompted many firms to trim inventories and production. Soon after, however, the combination of fiscal stimulus and social distancing — which shifted spending from services to goods — drove demand for goods to new highs. US consumer spending on durables in October 2021 was 40% higher than it was in October 2019.
Now, demand trends suggest that services will capture a larger share of consumer wallets, signaling that some supply chain strains will dissipate.
2. Transportation costs remain high
Normalizing consumer demand should take pressure off supply chains, but transportation bottlenecks are an ongoing issue. Morgan Stanley analysts think quarantine and travel restrictions for key transcontinental routes may stay in place throughout the year and don’t expect capacity increases until late 2023.
Meanwhile, the trucking industry is facing persistent labor shortages, all of which add up to higher logistics burdens throughout 2022. Further, a significant decline in airfreight capacity — about 65% into the US — is contributing to higher costs.
“We expect to see some supply chain relief in the first half of 2022 but expect this relief to be only limited and temporary,” says Ravi Shanker, Transportation & Airlines Analyst. Longer-term, near-shoring, changes in inventory management, and increased automation and insourcing are potential levers for improvement.
3. Dislocated cycle impacts earnings
The combination of easing demand and persistently higher transportation costs is laying the groundwork for a highly dislocated cycle in which earnings fall short of expectations for three super-sectors — Industrials, Semiconductors and Tech Hardware.
Indeed, the consensus expects 2021 EPS growth to finish at 44% for Semiconductors, 52% for Tech Hardware, and 86% for Industrials, but this sets a very high bar for 2022 and 2023, where consensus also sees continued strong earnings growth.
“We think the market may be disappointed by how quickly strong demand and long backlogs evolve into normalized demand and pockets of inventory overhang,” says Daniel Blake, Asia and Emerging Market Equity Strategist. Blake and his colleagues are more cautious on companies exposed to PCs and Consumer Hardware and more bullish on those exposed to Autos, Industrials, and data center infrastructure.
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