The long and short of shortages

An ETF investor guide to supply chain disruptions.


Gargi Pal Chaudhuri Oct 15, 2021

Video 2:02

Behind the supply chain strain

Here's how supply chain strains are impacting your day-to-day. Gargi Chaudhuri, Head of iShares Investment Strategy, explains on the BlackRock Bottom Line.

Supply chain shortages are everywhere, from delays in manufacturing to bottlenecks at different ports along the US and China, and this is leading to higher prices and fears around rising inflation.

 

BlackRock Bottom Line:

Behind the supply chain strain


The three sectors that we think have had the most impact, firstly, is the microchips and semiconductor sector. Secondly, is the labor market. And the last one is the housing market.

 

So we think about the semiconductor chips, as we all have become more digitized, we just need more semiconductor chips today than we did in the past. This demand has happened at a time when manufacturers of some of these semiconductor chips have pulled back on their supply, much of it due to COVID-related reasons.

 

Moving on to the labor market. Because of COVID, and also because of the great resignation, many people have still not been able to come back to the labor market. This is where we have seen an increase in demand for workers. As a result of that, wages will continue to go up.

 

The last one is around the housing market. If COVID taught us anything, it was that there's no place like home. As we all want more space to work from home, it's happening at a time when there is no inventory of homes in the market. Demand is also increasing as more and more people are entering that 30 to 35 age cohort, when people buy homes.

 

The bottom line is that supply chain disruptions are here to last longer than many people had predicted. As result, we think inflation can be somewhat higher for some time, and investors should be thinking about protecting their portfolios for higher inflation.

KEY TAKEAWAYS

  • Supply chain bottlenecks are hitting sectors including labor, microchips and housing.
  • Some of these disruptions will be around for the longer term, and investors should think about what they mean for portfolios.
  • ETFs can help provide diversified, low-cost access to targeted sectors of the market to help offset the effects of supply-chain disruptions.

Odds are high that you’ve recently experienced COVID-related supply chain woes in some form or another. The disruptions hit home for me at the local bike store, where the owner told me they would have no Treks in my size until March 2022 — a full six months from now. The hold-up is about delays in manufacturing overseas and a backlog at West Coast ports.

Investors can no longer avoid supply chain disruptions, whether it’s surging electricity prices in China (crippling factory production), a widespread microchip shortage (creating a scarcity of new cars), or a lack of workers to perform key jobs, like driving trucks (sparking delivery delays for gasoline). It appears that the reverberations of the pandemic on the economy will be with us for longer than most economists expected, and in complex ways.

This article lays out the supply chain considerations that keep coming up in our conversations and how exchange traded funds (ETFs) can help investors navigate the backdrop.

FORCES AT WORK

The most recent jobs report from the U.S. Department of Labor showed 5 million fewer people at work compared with before the pandemic.1 Many factors are at play: The pandemic has taken a significant toll on women, given fewer options for childcare.2 And about half of those no longer working are over 55, may have retired and are therefore not likely to return to the labor force.3

While there are fewer workers, demand for hiring has never been stronger. Job openings are near record levels with 49% more vacancies than pre-pandemic and more people quitting to find new jobs.4 The share of workers quitting their jobs hit the highest level since 2000, with a quits rate of 2.9%.4 Wages have ticked up based on the supply and demand dynamics, something we expect to continue in the medium term.

WHAT IT MEANS FOR INVESTORS

Higher wages mean higher costs for companies, and we favor sectors and industries that are less sensitive to labor costs and have the highest profit margins. On this front, think technology companies, consumer discretionary companies, and financial companies, including banks, to help insulate portfolios against rising labor costs.

S&P 500 industries with the highest profit margins (less impacted by rising wages / input costs)

Chart: S&P 500 industries with the highest profit margins (less impacted by rising wages / input costs)

Source: Aladdin, IBES, as of 9/30/2021.


FORCES AT WORK

Semiconductors are the backbone of powerful emerging technologies including AI and digital payments, and the subsector offers a relatively high free cash flow yield. Currently, there’s a global shortage of microchips driven by increased demand for technology and hardware (as many of us started learning and working from home), shutdowns in suppliers in places including Malaysia and Vietnam, and U.S. 2017 policies that limited sales from the U.S. to China and crimped production.

The resulting shortage in chips has impacted everything from computers to cars to phones to washing machines—pretty much anything considered “smart” technology.

WHAT IT MEANS FOR INVESTORS

U.S. stocks that design, manufacture and distribute semiconductors could benefit from higher prices in the short-term, which can be advantageous in the short term as supply chain issues persist and in the longer term as we continue to gravitate towards a more tech-enabled world.

FORCES AT WORK

A rush for more space and home improvements, paired with rising costs for building materials, heated up the housing market to levels not seen in decades. Pair these trends with low availability for new and existing homes and a rise in the number of people turning 30, supportive of more buyers entering the market. There are signs that the market is cooling following a 15% rise in housing prices in 2021, but there are no fears of a housing bubble akin to 2008.5

WHAT IT MEANS FOR INVESTORS

Real estate companies that invest directly in real estate can diversify portfolios and potentially generate income, and help protect against fast-rising inflation.

U.S. home prices rose at record pace

Chart: U.S. home prices rose at record pace

Source: Bloomberg, as of 9/30/2021. Index performance is for illustrative purposes only. Index performance does not reflect any management fees, transaction costs or expenses. Indexes are unmanaged and one cannot invest directly in an index. Past performance does not guarantee future results.


FORCES AT WORK

Fuel shortages in the U.K. and power curbs in China are putting the spotlight on insufficient energy supplies amid a powerful economic restart with strong energy demands. Underinvestment due to higher environmental standards, depleted inventories and longer delivery times are all behind the sharp rise in many commodity prices, from cotton to natural gas. This could continue well into winter months, when demand for energy is even greater.

WHAT IT MEANS FOR INVESTORS

On a short-term basis, we expect that commodity prices will move higher. But as public and private investments continue to drive a transition to an economy with lower greenhouse gas emissions, we think that traditional energy companies will feel margin compression from rising cost of capital. Shorter-dated bonds that provide protection for inflation and high-yield bonds that have significant holdings in energy sector companies could also be poised to perform well in the months ahead, in our view.

Natural gas prices surged globally, driven by supply shortages

Chart: Natural gas prices surged globally, driven by supply shortages

Source: Refinitiv Datastream, Intercontinental Exchange, Oxford Economics and BlackRock Investment Institute. Sept. 29, 2021. Notes: The lines show the natural gas prices in the U.S. and Europe since 2000. British Thermal Unit (BTU) is the traditional measurement unit for natural gas and represents the amount of energy needed to cool or heat one pound of water by one degree Fahrenheit.


Gargi Pal Chaudhuri

Gargi Pal Chaudhuri

Head of iShares Investment Strategy Americas at BlackRock

Jasmine Fan

Investment Strategist

Contributor