Eyeing companies poised to benefit from onshoring/friendshoring

Fidelity's Sammy Simnegar believes shifts in global supply chains and manufacturing hubs create opportunities in companies helping to facilitate this transition or those eligible for attractive policy support to build capacity.

• Amid shifting trends in globalization, companies that are building resilience in their supply chains and manufacturing bases, while taking advantage of government policies to support these moves, could be strengthening their competitive positioning for the next decade, according to Fidelity Portfolio Manager Sammy Simnegar.
• "It's a different world today, with many countries looking at globalization of supply chains and manufacturing with greater scrutiny," says Simnegar, who manages Fidelity Advisor^® International Capital Appreciation Fund. "Countries want to ensure that key industries function and that products are available in the event of a global or geopolitical shock, such as a pandemic."
• Simnegar says the multidecade trend of global integration, or globalization, that helped companies decrease labor and manufacturing costs, achieve supply-chain efficiency and improve their profit margin has plateaued for the past 15 years. That change, along with recent geopolitical conflict and the COVID-19 pandemic — which caused economic lockdowns and disrupted ports, shipping and factory operations — highlights the benefits of onshoring or friendshoring.
• "Globalization is no longer accelerating, nor is it reversing," he says. "And there is the potential for increased geopolitical risk or future shocks to a supply chain. In this environment, I am using Fidelity's global research capabilities to assess the ramifications for companies, focusing on the direct beneficiaries from the trend of moving supply chains, manufacturing and raw-materials sourcing closer to home."
• In managing the diversified international equity strategy since 2008, Simnegar favors high-quality growth stocks benefiting from long-term "mega trends," as well as the three "B's" — brands, barriers to entry and a "best in class" management team — using a proprietary quantitative screen and bottom-up fundamental analysis.
• Onshoring refers to a company having its business operations or manufacturing processes located within the same country as its headquarters. Simnegar notes that several governments have boosted policies to make manufacturing fortification economically advantageous for domestic-domiciled companies. The U.S. and other nations are providing new incentives, via new laws and regulations (e.g., the Inflation Reduction Act and the CHIPS and Science Act in the U.S., both enacted in August 2022). U.S. government spending initiatives in 2022 and 2023 generated $649 billion in private investments, he says.
• "We need to rebuild manufacturing infrastructure in the U.S., and other countries feel the same about fortifying their own capacity," says Simnegar, noting that firms that do so by taking advantage of government incentives "have the wind at their backs."
• Friendshoring refers to a government enacting policy to push businesses to restructure supply chains, shifting production away from geopolitical rivals to more-friendly powers. Simnegar cites the recent escalation in geopolitical tension between the U.S. and China as an example.
• "As tension increased, China saw U.S. sanctions on advanced technology as a hostile act," he explains. "The mistrust and the forced transfer of technology prompted a massive global movement, now underway, to bring manufacturing back to home shores."
• Simnegar sees compelling opportunities to invest in companies in a variety of industries that he believes are well-positioned to benefit from onshoring and friendshoring, including building materials, cement, industrial components (factory automation, HVAC equipment, plumbing supply), electric-vehicle batteries, semiconductors, rail transportation, industrial gas producers, and power generation, including solar and wind energy.
• As an example, the fund has favored Keyence, a Japan-based supplier of sensors and measuring instruments used to increase precision in factory automation, as well as reduce labor costs — a key factor when onshoring/nearshoring to more-expensive labor markets, according to Simnegar. About 40% of Keyence's revenue is derived from Japan, with 20% coming from the Americas and 15% from the European Union, he explains.
• "Keyence has been smartly positioning itself for further growth due to the trends of onshoring and friendshoring," says Simnegar, adding that management has been "astute at looking for growth opportunities, much like China did a decade or more ago. The company makes its customers more efficient; the timing of the return on investment from a Keyence system is very fast."
• The fund also counts Schneider Electric — a multinational provider of digital automation and energy technology solutions for homes, buildings, data centers and infrastructure — among its top overweight positions as of April 30. He says the company, which cites North America as its largest revenue base, should benefit from onshoring of new manufacturing capacity, such as semiconductor factories, which require specialized power solutions.
• "Schneider is one of several companies likely to benefit from the mega onshoring projects that are currently underway," Simnegar concludes.