• Supply chain and logistical headwinds persist; China’s strict Covid-19 policy not helping; “summer of discontent” may be brewing for European countries with staff shortages
• Growing global recessionary risks for the broader sector
• Downgrade to Underweight though there are select areas of opportunities for the longer-term investor riding on megatrends such as electrification, automation proliferation, and sustainability
Ever since we downgraded our rating on the Global Industrials sector to Neutral in April this year, the MSCI ACWI Global Industrials Index has corrected by about 10%, which is in line with the broader S&P decline over the same period. We were concerned about supply chain and logistical issues which have impacted the operations of firms, along with higher raw material prices which have also contributed to rising input costs.
Two months on, China is still contending with potential lockdowns due to its strict Covid-19 policy which is not helping supply chain issues. A “summer of discontent” may be in the on the horizon as the fast-rising cost of living may induce more strikes in European countries resulting in more disruptions. Combined with growing global recessionary risks, we are increasingly concerned about the outlook
of the Industrials sector.
We hereby downgrade our rating to Underweight, though we see select areas of opportunities for the
longer-term investor riding on the megatrends of electrification, automation, and sustainability. China infrastructure may also be a relatively brighter spot, but it accounts for a small weight in the MSCI ACWI Industrials index.
In the meantime, industrial companies exposed to the automotive, heavy trucks, machinery and equipment, and aerospace segments have been impacted by supply chain woes and rising costs in varying degrees. We would monitor for the potential surge in inflation leading to second-round effects via wages, which could call for more aggressive responses by central banks. (Research Team)