Supply-chain reaction: how long will disruption continue?

World in Motion – Global equities blog

Supply-chain reaction: how long will disruption continue?

2021 was marked by ongoing supply-chain disruption. But as we enter 2022, are we past the worst? A recent examination of long-term historic ISM (US Institute for Supply Management) survey data from Morgan Stanley looks at periods where lead times in supply chains have remained extended (Figure 1).

Figure 1: Supply chains – how long, how big, how steep … and what happens to IP growth?

Cycle start peak table with dates
Source: Haver Analytics/Morgan Stanley Research, until November 2021
This shows that over the past 60-plus years, the median length of time that supply disruptions last is a whopping 26 months. Up until November 2021 when the table was produced we were only clocking up a mere 18 months. I’m no economist, but this ties in remarkably well with the “bottom-up” conversations we’ve had with companies across a range of industries from automotive, machinery, consumer discretionary and tech hardware and equipment. Purchasing managers at such companies are still using “shrug” emojis in internal emails – there is very little visibility, and few corporates are forecasting a return to normality before the second half of this year with any confidence.
What happens when things get less bad? In a way, they get worse … typically (Figure 2). Morgan Stanley also ran the numbers on what happens to industrial production once supply chains normalise. The answer is that growth falls, and if we look at relatively recent periods of supply tightness beginning early 2013 and early 2016, industrial production actually contracted.

Figure 2: What happens to industrial production growth after supply-chain lead times peak?

Ip growth at supply chain peak
Source: Haver Analytics/Morgan Stanley, to November 2021
How do we rationalise this? Orders in backlogs can be less firm than they were initially for many months – call it customer fatigue – and supply tightness can crest the hill into demand erosion from both corporates and consumers. It will be up to stock markets to navigate such concerns over the coming months.
But is it different this time around? These are dangerous words for investors, but may ring true in certain industries and niches. Take heating, ventilation and air conditioning manufacturer Trane Technologies, which recently reported a US orderbook 90% larger than at 2020 year-end . As stimulus cheques are spent, and wealthier US consumers shift spending towards experiences and away from their homes, this could be a headwind. But Trane’s growth will likely be powered more significantly by larger corporate and government clients modernising due to both carrot-and-stick stimulus spending/tightening of emissions regulations – for example, significant spending on aged school buildings. The NextGenerationEU package will provide a similar narrative for Europe’s growth. More broadly, I feel that the theme of the “electrification of everything” – from passenger vehicles through to mining equipment and commercial buildings and factories – will be a stickier one, of higher growth for longer in these areas, even if the broader bounce-back out of Covid-19 slows.
31 January 2022
Simon_Haines
Simon Haines
Portfolio Manager
Share article
Apple web badge
Spotify web badge
Listen on Stitcher badge
January 2022
Share article

1 Trane Technologies, Financial Summary, November 2021

Important Information

Important Information: For use by Professional and/or Qualified Investors only (not to be used with or passed on to retail clients). This is an advertising document.

This document is intended for informational purposes only and should not be considered representative of any particular investment. This should not be considered an offer or solicitation to buy or sell any securities or other financial instruments, or to provide investment advice or services. Investing involves risk including the risk of loss of principal. Your capital is at risk.  Market risk may affect a single issuer, sector of the economy, industry or the market as a whole. The value of investments is not guaranteed, and therefore an investor may not get back the amount invested. International investing involves certain risks and volatility due to potential political, economic or currency fluctuations and different financial and accounting standards. The securities included herein are for illustrative purposes only, subject to change and should not be construed as a recommendation to buy or sell. Securities discussed may or may not prove profitable. The views expressed are as of the date given, may change as market or other conditions change and may differ from views expressed by other Columbia Threadneedle Investments (Columbia Threadneedle) associates or affiliates. Actual investments or investment decisions made by Columbia Threadneedle and its affiliates, whether for its own account or on behalf of clients, may not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not take into consideration individual investor circumstances. Investment decisions should always be made based on an investor’s specific financial needs, objectives, goals, time horizon and risk tolerance. Asset classes described may not be suitable for all investors. Past performance does not guarantee future results, and no forecast should be considered a guarantee either. Information and opinions provided by third parties have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed. This document and its contents have not been reviewed by any regulatory authority.

In Australia: Issued by Threadneedle Investments Singapore (Pte.) Limited [“TIS”], ARBN 600 027 414. TIS is exempt from the requirement to hold an Australian financial services licence under the Corporations Act and relies on Class Order 03/1102 in marketing and providing financial services to Australian wholesale clients as defined in Section 761G of the Corporations Act 2001. TIS is regulated in Singapore (Registration number: 201101559W) by the Monetary Authority of Singapore under the Securities and Futures Act (Chapter 289), which differ from Australian laws.

In Singapore: Issued by Threadneedle Investments Singapore (Pte.) Limited, 3 Killiney Road, #07-07, Winsland House 1, Singapore 239519, which is regulated in Singapore by the Monetary Authority of Singapore under the Securities and Futures Act (Chapter 289). Registration number: 201101559W. This document has not been reviewed by the Monetary Authority of Singapore.

In Hong Kong: Issued by Threadneedle Portfolio Services Hong Kong Limited 天利投資管理香港有限公司. Unit 3004, Two Exchange Square, 8 Connaught Place, Hong Kong, which is licensed by the Securities and Futures Commission (“SFC”) to conduct Type 1 regulated activities (CE:AQA779). Registered in Hong Kong under the ce (Chapter 622), No. 1173058.

In Japan: Issued by Columbia Threadneedle Investments Japan Co., Ltd. Financial Instruments Business Operator, The Director-General of Kanto Local Finance Bureau (FIBO) No.3281, and a member of Japan Investment Advisers Association.

In the UK: Issued by Threadneedle Asset Management Limited, registered in England and Wales, No. 573204. Registered Office: Cannon Place, 78 Cannon Street, London EC4N 6AG. Authorised and regulated in the UK by the Financial Conduct Authority.

 

In the EEA:  Issued by Threadneedle Management Luxembourg S.A. Registered with the Registre de Commerce et des Sociétés (Luxembourg), Registered No. B 110242 44, rue de la Vallée, L-2661 Luxembourg, Grand Duchy of Luxembourg.

 

In the Middle East: This document is distributed by Columbia Threadneedle Investments (ME) Limited, which is regulated by the Dubai Financial Services Authority (DFSA).

For Distributors: This document is intended to provide distributors with information about Group products and services and is not for further distribution.

For Institutional Clients: The information in this document is not intended as financial advice and is only intended for persons with appropriate investment knowledge and who meet the regulatory criteria to be classified as a Professional Client or Market Counterparty and no other Person should act upon it.

 

In Switzerland: Threadneedle Asset Management Limited. Registered in England and Wales, Registered No. 573204, Cannon Place, 78 Cannon Street, London EC4N 6AG, United Kingdom. Authorised and regulated in the UK by the Financial Conduct Authority. Issued by Threadneedle Portfolio Services AG, Registered address: Claridenstrasse 41, 8002 Zurich, Switzerland.

 

Columbia Threadneedle Investments is the global brand name of the Columbia and Threadneedle group of companies.

Related Blog Posts

17 October 2024

Neil Robson

Head of Global Equities

Power hungry AI - investment implications in the era of energy transition

Understanding the options for power provision and assessing the investment opportunities resulting from AI’s thirst for energy.
23 August 2024

Neil Robson

Head of Global Equities

On pause: the one-way certainty of the market is over … for now

The macroeconomic backdrop is changing, or at least uncertain. This could shift the pricing of risk assets, but it won’t change what we do, which is look for stronger competitively advantaged businesses that fit our quality growth philosophy.
Read time - 3 mins
24 July 2024

Jonathan Crown

Portfolio Manager

David Dudding

Senior Portfolio Manager, Global Equities

Scott Woods

Portfolio Manager

Claire Franklin

Fund Manager

Jamie Jenkins

Managing Director, Head of Global ESG Equities

Page turners – our summer reading list

Which books have kept our global equities team turning pages in recent months? From AI to geopolitics in space, Charles De Gaulle, and music loving detectives. It’s an eclectic mix.
Read time - 3 mins

You may also like

Investment approach

Teamwork defines us and is fundamental to our investment approach, which is structured to facilitate the generation, assessment and implementation of good, strong investment ideas for our portfolios.

Funds and Prices

Columbia Threadneedle Investments has a comprehensive range of investment funds catering for a broad range of objectives.

Our Capabilities

Teamwork defines us and is fundamental to our investment approach, which is structured to facilitate the generation, assessment and implementation of good, strong investment ideas for our portfolios.

Thank you. You can now visit your preference centre to choose which insights you would like to receive by email.

To view and control which insights you receive from us by email, please visit your preference centre.

Woman listens to music through headphones
Play Video

CT Property Trust- Fund Manager Update

Sed ut perspiciatis unde omnis iste natus error sit voluptatem accusantium doloremque laudantium