Spotlight on the Markets: Are Supply Chains the New Grinch

• An expansion of vaccination programs and generous government aid boosted consumers’ and companies’ confidence and consumption in developed markets.
• But that demand recovery has varied across geographies, and is facing some challenges, as bottlenecks in supply chains have led to shortages and price increases.
• Investors will navigate these challenges through the holiday season and beyond, looking for answers about how global supply chains will function, as well as how and how aggressively central banks will respond.

As the world has recovered from the impact of the pandemic, consumers and investors are finding that challenges in supply chains are affecting the availability and prices of goods. And as we get deeper into the holiday period, the seasonal uptick in consumption may exacerbate shortages. Investors are working to incorporate these challenges into decision-making, even as global equity markets posted positive returns, as of the end of October.

How Have Markets Performed?

While emerging markets (EM), boosted by a speedier recovery from China, outperformed over 2020, this year developed-market equities, led by the U.S., took the lead as vaccination programs expanded and more generous government aid helped companies and individuals.

2021 Index Performance by Geography

All index performance figures are net and in USD, as of Oct. 29, 2021.

The U.S. has been the strongest contributor to the MSCI World Index’s performance, driven by stronger momentum and higher beta. A stronger U.S. dollar has also helped, especially for exporter-led businesses. From an industry-group perspective, there was a positive impact from companies in software and services, as well as those in semiconductors and semiconductor equipment.

In EM, China was a drag on performance, with overall market sentiment affected by increased regulatory scrutiny in certain sectors and concerns about the debt of its largest property developer. Other countries in EM, such as Taiwan, benefited from increased demand for components and finished high-tech goods.

How Did We Get Here?

As the recovery from COVID-19 lockdowns and closures took hold, prior patterns of consumption resumed in earnest and at a faster pace than we’ve observed in prior recoveries. In the U.S. where the upturn has been faster and sharper than in other developed markets, savings rates returned to pre-pandemic levels (7.5% as of September 2021, after reaching 33.8% in April 2020) as personal consumption strongly recovered (see the exhibit below).

US Personal Consumption Rebounded

Percentage quarterly change from year-ago quarter in real personal-consumption expenditures, seasonally adjusted, as of June 30, 2021. Source: FRED, Federal Reserve Bank of St. Louis

Not So Fast

But not everything is being turned back on at the same time. And the reliance on global supply chains means that bottlenecks may appear in different nodes of the chain, causing delays and price increases.

For example, the closure of chip manufacturers during lockdown led to the depletion of inventory, pushing up prices and limiting supply. Some producers, mainly in Taiwan, also suffered disruption to production due to water shortages. Production has started to come back online, but demand remains high, especially in consumer electronics. Car manufacturers that had canceled or delayed chip orders as the pandemic’s effects revved up have found it difficult to get needed components, and production has suffered.

In the second half of this year, we saw the Baltic Dry Index, a leading indicator of economic activity, rise substantially (hitting a 10-year high in September) — which indicated strong demand for raw materials and commodities, and that economies were growing again and companies were feeling optimistic enough to ramp up production. This helped buoy stock-market performance for shipping companies after months of restrictions, but came with additional costs for producers and consumers. Shipping costs have gone up since the start of the pandemic due to reduced capacity, port closures/congestion and lack of alternatives. Limitations on container capacity could last until the fourth quarter of 2022, according to maritime research firm Drewry,¹ which could continue to put pressure on prices and the movement of goods and raw materials.

And then there has been the issue of labor shortages. Employment has recovered as economic activity resumed, but not in a uniform manner around the globe, as many regions are still dealing with low vaccination levels and high infection rates.

Adding to production and shipping headaches, we also saw a step change in how goods are consumed. The boom in online shopping during lockdowns further complicated logistics for retailers and distributors, given that delivering goods to individual consumers is more complex than delivering goods to a warehouse for bulk distribution to stores. A recent survey by PwC in the U.K. showed that, although stores have reopened, consumers still intend to shop online for 59% of all Christmas shopping.² Worldwide, e-commerce is expected to grow at an average of 47% in the next five years.³

And … Cue Inflation

When demand is greater than supply, of course, prices go up. And this has certainly been true in the U.S., where inflation reached 6.2% at the end of October, the highest it has been for 20 years, as seen in the exhibit below.

US Inflation on the Rise

Twelve-month percentage change in the consumer price index, all categories, as of Oct. 31, 2021. Source: U.S. Bureau of Labor Statistics

Inflation also picked up in the eurozone (from 3.4% in September to 4.1% in October to 4.9% in November, based on annual figures)⁴ and in the U.K. (from 2.9% in September to 3.8% in October; annual figures).⁵

And indicators suggest demand may still have a way to go, as exports have picked up, but not all regions are back to trend, as seen in the exhibit below.

Global Growth Rates of Merchandise Exports and Imports

Quarterly data, from base year 2005 through Q2 2021. Source: United Nations Conference on Trade and Development

Naughty or Nice?

Investors will work to navigate these challenges through the holiday season and beyond. Should the recovery expand across markets, supply-chain pressure may continue, affecting delivery and prices of goods, which means it’s in everyone’s interests to work together to foster supply-chain resilience, including the potential for further support in domestic production capabilities to minimize reliance on global supply chains. Many questions remain on this essential question, as well as how central banks proceed when it comes to combating inflation.

¹Wackett, Mike. “Shipper hopes dashed with prediction of no supply chain recovery before Q4 22.” The Loadstar, July 10, 2021.

²“Festive Predictions — 2021: How, where and what are shoppers spending on Christmas and Black Friday this year?” PwC, November 2021.

³Buchholz, Katharina. “Economics: These are the world's largest e-commerce markets.” World Economic Forum, Sept. 8, 2021.

⁴Arnold, Martin. “Record eurozone inflation of 4.9% puts pressure on ECB.” Financial Times, Nov. 30, 2021.

⁵“Consumer price inflation, UK: October 2021.” Office for National Statistics, Nov. 17, 2021.

Further Reading

Hedging Inflation with Equities

How Climate Change Affected Thirsty Chipmakers

The Impact of China’s New Regulations: A Thematic Lens

After Evergrande: Bond Liquidity of Chinese Property Developers