Quick takes on capital markets

27 May 2022

Supply chains: Expect more disruptions

As COVID-19 lockdowns in China persist, so do increasing wait times at China’s ports. The longer that China’s zero-COVID policy disrupts global supply chains, the more likely that companies will look to relocate suppliers, with ASEAN and Latin American countries poised to potentially benefit.

Global trade is being impacted by China’s zero-COVID policy
Chinese export growth, YoY, %

Cinese export growth, December 2019 to March 2022
Source: Bloomberg, Principal Global Equities. Data as of May 26, 2022

Average wait times for container ships have tripled in Shanghai, as the latest zero-COVID lockdowns in China have had a ripple effect on global production. Since it takes a container ship upwards of 40 days to reach many destinations from China, ships coming into port today likely left Shanghai before the most recent bout of lockdowns. The magnitude of these yet-to-be-realized supply chain delays is massive—China accounts for 18% of all U.S. imported goods, and nearly 35% for computer & electronics equipment.

The impact is already appearing in the data. Coming off a YoY peak in 2021, driven by the low-base effect from COVID, China trade data has started declining and continues to trend lower. As long as the China domestic zero-COVID policy remains in place, supply chains will experience disruptions.

For investors, global supply chains that remain challenged are creating new opportunities. In the near-term, domestically oriented businesses, such as small caps, should benefit as their more locally sourced supply-chains are somewhat insulated from global disruptions. Longer-term, companies in the ASEAN region and Latin America may grow as businesses invest capital to diversify supply-chain sources and bring production closer to the U.S., Europe and other destination ports. As disruption creates new opportunities for active investors, the current market sell-off may offer more attractive valuations for those countries poised to potentially benefit.

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