The ongoing supply chain bottlenecks will likely incrementally ease from here. That said - we still see plenty of uncertainties ahead.
Over the last few months, concerns over supply chain issues have increased markedly. After the Delta wave hit Asian production in the summer, many developed economies also experienced more local supply chain issues, from labour shortages, to logistic problems. All of these have fed into a market narrative which was already quite worried about inflation since the beginning of the year. The rally in commodity prices in October, plus a sluggish recovery in labour market participation rate in developed markets, exacerbated these concerns.
As a results of these developments, markets and policymakers have had to continuously adjust their expectations for inflation as well as policy. This has contributed a lot to the recent interest rate and equity market volatilities.
That said, it is interesting to note that, of late, some parts of the supply side inflation pictures has looked a little better. The BDIY (Baltic Exchange Dry Index) which measures the price of moving major raw materials globally across 23 different routes, have fallen by more than 50% since hitting a post-Global Financial Crisis high in early October. The closely watched shipping rates between China and the West and East coasts of the United States, and pulled back by around 30% since mid-September. After sounding alarms about shortages over the last few weeks, more CEOs and CFOs of large US companies have also sent more reassuring signals lately about having sufficient supplies over the year-end holiday season. In Asia, after the unexpected severe Delta wave hit productions in the summer, manufacturing activity appear to be bouncing back. The pandemic looks better contained and vaccination rate has picked up.
So far these improvements appears to be incremental, as well as uneven. Supplier Delivery Times, as measured by Markit PMI for the US, continue to hover at a historically low level –suggesting unprecedented waiting times. Even in shipping, routes outside of the US and China, for example, shipping rates between China to Europe, have merely plateaued, rather than declined, and remain at a historic high level. Thus it is possible that a confluence of factors, including demand, supply, inventory, as well as the effect of the pandemic are still stressing some parts of the global supply chain. And even while company executives have sounded more optimistic lately, the majority only expect supply chain disruptions to be solved in mid-2022.
Given the considerable uncertainty with regard to how the pandemic will evolve in the coming months, this means it is still premature to say that supply side inflation is going away for good, or even peaked on a global scale. That said, given inflation expectations are already running high, and rates markets have moved pre-emptively with regard to rate hikes, some easing of supply side issues will nonetheless be a positive tailwind for risk assets, as well as allowing us to fade some of the more aggressive interest rate pricings. In an earlier report, we discussed how central banks policies may diverge in 2022, largely based on the differences in their inflation tolerance level. Although some central banks have already reacted more hawkishly, we believe the Fed and the ECB will likely hold on to a more gradual path of policy normalisation. This is a key assumption behind our more positive views on global equities, particularly developed market equities in 2022. Over the last few months, concerns over supply chain issues have increased markedly. After the Delta wave hit Asian production in the summer, many developed economies also experienced more local supply chain issues, from labour shortages, to logistic problems. All of these have fed into a market narrative which was already quite worried about inflation since the beginning of the year. The rally in commodity prices in October, plus a sluggish recovery in labour market participation rate in developed markets, exacerbated these concerns.
As a results of these developments, markets and policymakers have had to continuously adjust their expectations for inflation as well as policy. This has contributed a lot to the recent interest rate and equity market volatilities.
That said, it is interesting to note that, of late, some parts of the supply side inflation pictures has looked a little better. The BDIY (Baltic Exchange Dry Index) which measures the price of moving major raw materials globally across 23 different routes, have fallen by more than 50% since hitting a post-Global Financial Crisis high in early October. The closely watched shipping rates between China and the West and East coasts of the United States, and pulled back by around 30% since mid-September. After sounding alarms about shortages over the last few weeks, more CEOs and CFOs of large US companies have also sent more reassuring signals lately about having sufficient supplies over the year-end holiday season. In Asia, after the unexpected severe Delta wave hit productions in the summer, manufacturing activity appear to be bouncing back. The pandemic looks better contained and vaccination rate has picked up.
So far these improvements appears to be incremental, as well as uneven. Supplier Delivery Times, as measured by Markit PMI for the US, continue to hover at a historically low level –suggesting unprecedented waiting times. Even in shipping, routes outside of the US and China, for example, shipping rates between China to Europe, have merely plateaued, rather than declined, and remain at a historic high level. Thus it is possible that a confluence of factors, including demand, supply, inventory, as well as the effect of the pandemic are still stressing some parts of the global supply chain. And even while company executives have sounded more optimistic lately, the majority only expect supply chain disruptions to be solved in mid-2022.
Given the considerable uncertainty with regard to how the pandemic will evolve in the coming months, this means it is still premature to say that supply side inflation is going away for good, or even peaked on a global scale. That said, given inflation expectations are already running high, and rates markets have moved pre-emptively with regard to rate hikes, some easing of supply side issues will nonetheless be a positive tailwind for risk assets, as well as allowing us to fade some of the more aggressive interest rate pricings. In an earlier report, we discussed how central banks policies may diverge in 2022, largely based on the differences in their inflation tolerance level. Although some central banks have already reacted more hawkishly, we believe the Fed and the ECB will likely hold on to a more gradual path of policy normalisation. This is a key assumption behind our more positive views on global equities, particularly developed market equities in 2022.
As a results of these developments, markets and policymakers have had to continuously adjust their expectations for inflation as well as policy. This has contributed a lot to the recent interest rate and equity market volatilities.
That said, it is interesting to note that, of late, some parts of the supply side inflation pictures has looked a little better. The BDIY (Baltic Exchange Dry Index) which measures the price of moving major raw materials globally across 23 different routes, have fallen by more than 50% since hitting a post-Global Financial Crisis high in early October. The closely watched shipping rates between China and the West and East coasts of the United States, and pulled back by around 30% since mid-September. After sounding alarms about shortages over the last few weeks, more CEOs and CFOs of large US companies have also sent more reassuring signals lately about having sufficient supplies over the year-end holiday season. In Asia, after the unexpected severe Delta wave hit productions in the summer, manufacturing activity appear to be bouncing back. The pandemic looks better contained and vaccination rate has picked up.
So far these improvements appears to be incremental, as well as uneven. Supplier Delivery Times, as measured by Markit PMI for the US, continue to hover at a historically low level –suggesting unprecedented waiting times. Even in shipping, routes outside of the US and China, for example, shipping rates between China to Europe, have merely plateaued, rather than declined, and remain at a historic high level. Thus it is possible that a confluence of factors, including demand, supply, inventory, as well as the effect of the pandemic are still stressing some parts of the global supply chain. And even while company executives have sounded more optimistic lately, the majority only expect supply chain disruptions to be solved in mid-2022.
Given the considerable uncertainty with regard to how the pandemic will evolve in the coming months, this means it is still premature to say that supply side inflation is going away for good, or even peaked on a global scale. That said, given inflation expectations are already running high, and rates markets have moved pre-emptively with regard to rate hikes, some easing of supply side issues will nonetheless be a positive tailwind for risk assets, as well as allowing us to fade some of the more aggressive interest rate pricings. In an earlier report, we discussed how central banks policies may diverge in 2022, largely based on the differences in their inflation tolerance level. Although some central banks have already reacted more hawkishly, we believe the Fed and the ECB will likely hold on to a more gradual path of policy normalisation. This is a key assumption behind our more positive views on global equities, particularly developed market equities in 2022. Over the last few months, concerns over supply chain issues have increased markedly. After the Delta wave hit Asian production in the summer, many developed economies also experienced more local supply chain issues, from labour shortages, to logistic problems. All of these have fed into a market narrative which was already quite worried about inflation since the beginning of the year. The rally in commodity prices in October, plus a sluggish recovery in labour market participation rate in developed markets, exacerbated these concerns.
As a results of these developments, markets and policymakers have had to continuously adjust their expectations for inflation as well as policy. This has contributed a lot to the recent interest rate and equity market volatilities.
That said, it is interesting to note that, of late, some parts of the supply side inflation pictures has looked a little better. The BDIY (Baltic Exchange Dry Index) which measures the price of moving major raw materials globally across 23 different routes, have fallen by more than 50% since hitting a post-Global Financial Crisis high in early October. The closely watched shipping rates between China and the West and East coasts of the United States, and pulled back by around 30% since mid-September. After sounding alarms about shortages over the last few weeks, more CEOs and CFOs of large US companies have also sent more reassuring signals lately about having sufficient supplies over the year-end holiday season. In Asia, after the unexpected severe Delta wave hit productions in the summer, manufacturing activity appear to be bouncing back. The pandemic looks better contained and vaccination rate has picked up.
So far these improvements appears to be incremental, as well as uneven. Supplier Delivery Times, as measured by Markit PMI for the US, continue to hover at a historically low level –suggesting unprecedented waiting times. Even in shipping, routes outside of the US and China, for example, shipping rates between China to Europe, have merely plateaued, rather than declined, and remain at a historic high level. Thus it is possible that a confluence of factors, including demand, supply, inventory, as well as the effect of the pandemic are still stressing some parts of the global supply chain. And even while company executives have sounded more optimistic lately, the majority only expect supply chain disruptions to be solved in mid-2022.
Given the considerable uncertainty with regard to how the pandemic will evolve in the coming months, this means it is still premature to say that supply side inflation is going away for good, or even peaked on a global scale. That said, given inflation expectations are already running high, and rates markets have moved pre-emptively with regard to rate hikes, some easing of supply side issues will nonetheless be a positive tailwind for risk assets, as well as allowing us to fade some of the more aggressive interest rate pricings. In an earlier report, we discussed how central banks policies may diverge in 2022, largely based on the differences in their inflation tolerance level. Although some central banks have already reacted more hawkishly, we believe the Fed and the ECB will likely hold on to a more gradual path of policy normalisation. This is a key assumption behind our more positive views on global equities, particularly developed market equities in 2022.
Authors:
Alex Wolf, Head of Investment Strategy for Asia
Julia Wang, Global Market Strategist
Yuxuan Tang, Global Market Strategist
Weiheng Chen, Global Market Strategist
For over a year, supply bottlenecks have been impacting businesses across sectors and geographies, pushing up prices and biting into margins. Due to the significant implications on growth and markets, investors are watching closely for any signs of improvement. In today’s note, we examine the current situation, potential early signs of easing, as well as the uncertainties looking ahead.
Disruptions from production shutdowns and mobility restrictions have pressured global supply chains since the early stage of the pandemic, but the initial shock quickly faded as major manufacturing hubs (i.e. China, ASEAN) quickly went back online. That’s why supply shortages were not on most investors’ radars until late 2020, when shipping costs skyrocketed and delivery lags increased in the U.S. and Europe, as consumer demand in the developed world staged a strong recovery on the back of reopening and large stimulus. Since then, the situation has continued to deteriorate due to a combination of factors (see more in our previous report).
Having dealt with the situation for a year now, it’s a good time to review where we stand. The below chart maps out survey results across the globe on the average length of time agreed by suppliers to deliver their goods. A number above 50 means faster delivery compared with a month ago, and vice versa. Broadly, we have not yet seen clear signs of improvement. By geography, the developed world is much more severely impacted due to a higher reliance on imports of consumer goods. In Asia, Japan is experiencing a significant impact due to its position as largely an end-consumer on supply chains, similar to its western developed peers. Taiwan stands to fare the worst, largely due to semiconductor-specific factors (but it also seems to have passed the trough). Most emerging economies in Asia are less impacted thanks to their domestic production capabilities.
The general situation of supply shortages is likely to persist for a while. However, tentative bright spots have started to emerge in certain areas. Recent data shows both production and shipping constraints in key manufacturing economies appear to be past the worst.
First, the worst of the COVID wave – and by extension factory shutdowns and labor shortages – appears to have passed in critical manufacturing economies in Southeast Asia, including Vietnam and Malaysia. Production appears to be gradually recovering there, which provides some much-needed relief for embattled retailers and manufacturers in developed markets struggling with shortages of consumer goods and key industrial components exported from the region.
Second, some measures of global shipping costs indicate that the worst of the spike in prices may have passed. They remain a step above pre and early-pandemic levels, but some routes have seen declines of about 20% in recent months. The magnitude varies across routes, but the ones most critical to global trade flows – namely between China and developed markets in the U.S. and Europe – saw noticeable moderation.
In addition, port congestions, especially on the U.S. West Coast, have been another flashpoint for supply shortages. High numbers of container ships are still idling offshore waiting to unload their cargo, though there are early indications that the situation is also improving, with the number of idle containers down 30% since a fine was instituted.1
Given market concerns about the impact of rising shipping costs on corporate margins, it is informative to hear how corporations are managing the situation, and understand their views and plans for the coming months. For example, Walmart chartered its own ships to get around shipping congestion and maintains a comfortable level of inventory heading into the holiday season. They also expressed confidence in sales growth to offset supply issues.2 Autos, the epicenter of supply shortages (especially in semiconductors), have also started hinting at an improving situation. Toyota announced that it will begin making up for lost production in December, with their Japanese factories returning to normal capacity for the first time in seven months. GM noted that semiconductor supply has improved and that it had no idle North American assembly plants for the first time since February.3 While these are just anecdotes, they could suggest a turning point in confidence for corporations navigating this saga.
A recent CFO survey by the Richmond and Atlanta Fed also suggests optimism – 60-70% of U.S. companies expect production and shipping delays to resolve over the course of next year, and they are also taking steps to diversify supply chains and increase inventories to manage these issues. This bodes well for the potential beneficiaries from increased capex and manufacturing demand.
In our view, the ongoing supply chain bottlenecks will likely incrementally ease from here, driven by further reopening, mitigation efforts by corporates, as well as waning pent-up demand. That said, there are still plenty of uncertainties ahead. First and foremost, it will be critical to watch the continued evolution of the pandemic in the coming months. Should there be another wave of infections caused by winter weather, or if new mutations lead to renewed lockdowns in production hubs – the situation could get worse before it gets better. We are also watching out for some key time periods, i.e. the upcoming Christmas season and the 2022 Lunar New Year. There were some warnings of acute goods shortages going into the holidays, though major retailers in the U.S. appear confident that they are able to keep shelves stocked. The Lunar New Year in February 2022 will likely shut factories in China and slow output, potentially giving some breathing room for shipping backlogs to clear. Another potential flashpoint on the horizon may occur in Spring 2022 when West Coast dockworkers are set to renegotiate their labor contracts, which are due to expire in July. Complications or tensions in those negotiations could lead to potential strikes (which have happened before) and in turn worsen port congestion.
What does it all mean for investors?
Given the considerable amount of uncertainty, it is still premature to say that supply-side inflation is going away for good, or has even peaked on a global scale. That said, given inflation expectations are already running high, and rates markets have moved pre-emptively with regard to rate hikes, some easing of supply bottlenecks may nonetheless be a positive tailwind for risk assets, and allow us to fade some of the more aggressive interest rate pricings.
Therefore, we maintain our constructive views on global equities, particularly in developed markets. As we discussed in an earlier report, central bank policies may diverge in 2022, largely based on the differences in their inflation tolerance levels. However, although some central banks have reacted in a more hawkish way, we believe the Fed and the ECB will likely be able to hold on to a more gradual path of policy normalization, which is the anchor of our views.
1 Blomberg Finance L.P., as of November 17, 2021. https://www.bloomberg.com/news/articles/2021-11-16/container-glut-eases-as-los-angeles-port-threatens-penalties?sref=L75TRUmI
2 The New York Times, as of November 16, 2021. https://www.nytimes.com/2021/11/16/business/walmart-3q-2021-earnings.html
3 Reuters, FactSet, as of November 12, 2021. https://www.reuters.com/business/autos-transportation/toyota-says-it-will-start-making-up-lost-production-december-2021-11-12/
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