We believe the long-term trend of moving manufacturing and services off-shore to lower-cost centres may be experiencing something of a reversal.
This process of re-shoring is being driven by a number of factors, including: the narrowing of wage costs between the developed and developing world; the falling cost of energy driven by the shale boom; increased costs of transportation; the desire to respond to customer needs more quickly; the fear of intellectual property falling into the wrong hands; and the public relations benefit of bringing business back to the US at a time when job creation remains a concern.
While we are not advocating a wholesale reversal of the off-shoring trend, we believe companies are increasingly thinking twice before relocating their operations overseas, and we note recent examples such as General Electric’s decision to move the manufacturing of washing machines and fridges from China to Kentucky.
Infrastructure, such as roads, airports and broadband, is the backbone of a country, and essential for the smooth running of an economy.
When infrastructure is inadequate, it places a burden on an economy and reduces its competiveness in the global marketplace. A report earlier this year gave US infrastructure a ‘D+’ and highlighted that $3.6tn needs to be invested by 2020.
We therefore expect to see increased spending on infrastructure, and a normalisation of US construction as a proportion of GDP. By increasing investment, the government can kill two birds with one stone: better infrastructure to make the US more competitive and increased job creation.
We believe the recent improvement in the housing market, combined with lower rates of unemployment and a recovering stock market, has driven an improvement in consumer finances, and with it confidence and a willingness to spend.
As a result, we believe consumers will look to catch up with purchases postponed since the credit crunch and replace durable goods, such as washing machines, TVs and cars, which are currently much older than average.
At a time of high energy prices and increased concern over climate change, the replacement of old products also makes economic sense as a result of the improved efficiency of modern equipment.
We highlight a number of stocks that we believe play well to this theme:
Union Pacific – The railroad operator will benefit from a pick-up in economic growth in the US. In particular, as a large transporter of raw materials for the construction industry and frac sands for the shale industry, the group will benefit from increased transportation volumes.
Whirlpool – The world’s leading manufacturer and marketer of major home appliances will benefit from a pick-up in expenditure on consumer durables goods.
Wolseley – The supplier of plumbing and heating products is already benefiting from a pick-up in housebuilding and, in time, will benefit from a recovery in repair and maintenance, and non-residential construction.
Compass Group – The leading supplier of contract catering to companies will benefit from increased levels of employment and increased consumer spending at its sites.
