Global markets: Global equities face supply chain challenges

Laraib Shahid asks to what extent the ‘Great Resignation’ theory explains issues with supply chains and considers the prospects for 2023.

The pressure from worldwide supply chain shortages looks set to continue as global equity managers enter 2023.

Take the example of Liontrust Asset Management, which saw €586 million in net outflows in the second quarter of 2022. In response, it overhauled the management of €732 million of its funds in July, citing supply chain issues as one of the principal challenges for its business.

Part of the problem of supply chain shortages is the ‘Great Resignation’ phenomenon, a term coined by Dr Anthony Klotz, professor of management at University College London’s School of Management. This goes some way to explaining why, according to the US Bureau of Labor Statistics, more than 47 million Americans willingly quit their jobs in 2021.

Klotz’s view is that pandemic-related “epiphanies” about “family time, remote work, commuting, passion projects, life and death” have changed how employees think about work. Indeed, the wave that started during the Covid-19 pandemic has yet to end. People are still abandoning jobs in search of flexibility or, more conventionally, higher pay.

The problem today with supply chain shortages may be less specifically about unemployment and more about workers’ unwillingness to fill vacant jobs. This is an area of concern for many businesses, where staff shortages can hinder assembling or delivering goods and services, causing a disruptive knock-on effect further down the supply chain.

Richard Saldanha, global equity fund manager at Aviva Investors, says: “The global supply chain shortage continues to be an issue that is affecting companies across multiple geographies and industries. The more global nature of supply chains has in many ways exacerbated these pressures.”

Not at full capacity

Even though jobs disrupted during the pandemic have returned, employers face difficulties hiring staff at full capacity. According to the professional services company Accenture, 75% of companies have felt negative or strongly negative impacts on their business due to supply chain disruptions.

In September, the unemployment rate fell to 3.5% in the US. Payrolls are on an upward trajectory and, in the words of Schroders’ chief economist and strategist, Keith Wade, “although job openings have fallen slightly, there are still nearly two vacancies for every unemployed person” in the US. There are almost 11 million job vacancies there, but only 6.5 million workers were listed as unemployed in 2022.

Covid-19 did spark a wave of job resignations and supply chain disruptions, but geopolitical crises and demographic changes made the situation more alarming. Nonetheless, the reasons for labour shortages may differ according to each country’s circumstances.

For example, the rise in job vacancies in the UK has been highest in jobs that leaned heavily on EU citizens, such as warehouse workers. However, other reasonable explanations exist, such as increased job turnover following the pandemic and more significant numbers of people becoming economically inactive or seeking early retirement.

Job adverts in the UK reached a record high in 2022, despite the fact that economic challenges are expected to cause a slowdown in recruitment activity. The Recruitment and Employment Confederation’s latest Labour Market Tracker revealed that in July 25-31, the number of active job adverts across the UK hit 1.85 million.

“The global supply chain shortage continues to be an issue across multiple geographies and industries. The more global nature of supply chains has in many ways exacerbated these pressures.”

The UK’s Office of National Statistics reported that half of more than 400,000 employees quit the workforce between February 2020 and November 2021 due to long-term health issues. In the US, a recent survey revealed that two-thirds of millennials who did so in 2021 cite mental health as the primary reason.

Professor Chris Forde, part of the Renewing Work Advisory Group of Experts – a national, independent advisory group run by Warwick and Leeds universities – notes that although the reasons for the UK’s current labour shortages are complicated, its recruiting difficulties are not unique. Several other countries have experienced high vacancy rates post-pandemic, he says.

The Migration Observatory reported that in May 2022, unemployment reached 2.8% in Germany, 3.3% in the Netherlands and 3.6% in the US, with job vacancy rates in the EU rising sharply in 2021 and 2022, respectively transcending pre-pandemic levels.

Meanwhile, employers in Australia were toiling to fill nearly 400,000 vacant positions as of early 2022.

A report by management consultancy Korn Ferry, called ‘Future of Work: The Global Talent Crunch’, estimates there will be a worldwide shortage of 85 million workers by 2030 – that’s roughly the population of Germany.

At the same time, Russia and China could be short of 6 million and 12 million workers, respectively.

The US could face a deficit of more than 6 million, but that’s small about Japan, Indonesia and Brazil – each of which could have shortfalls of up to 18 million skilled workers.

Reduced revenues

If the labour shortage persists and worsens, business revenues will likely suffer. The US technology sector, for example, could see revenues drop by $162 billion a year. Werner Penk, president of Korn Ferry’s Global Technology Market practice, says: “As with many economies, the onus falls on the companies to train workers and also to encourage governments to rethink education programmes to generate the talent pipelines the industry will require.”

Limited migration during the pandemic also took its toll. The effects of reopening after long periods of Covid-related restrictions contributed to labour shortages in many territories, including the EU and the US.

Migrant workers make up 5% of the global workforce. Countries such as the US, Saudi Arabia, the United Arab Emirates, Canada, Germany and the UK depend heavily on these workers to meet production demands. The pandemic came as a significant hindrance as countries set stricter immigration policies. In the UK, a combination of Covid-19 and Brexit caused immigration rates to fall by 90% in 2020.

Data shows that the UK was worst hit by labour shortages and subsequent supply chain issues, indicating that post-Brexit rules on immigration may have exacerbated the problems.

According to the Office of National Statistics’ latest findings, 16% of businesses that did not close down permanently during Covid-19 experienced global supply chain disruption in January 2022. These disruptions have been most acute in the manufacturing, wholesale, and retail trade industries (30%).

“Key to a sustained fall in core inflation is a weakening of the labour market, which so far has remained resilient in the face of this year’s slowdown in growth.”

Until workers choose to come back and fill vacant positions and the demand for employees is reduced, wages will keep rising, adding to cost pressures. This will cause knock-on effects in the wider economy. As Schroders’ Wade puts it: “Key to a sustained fall in core inflation is a weakening of the labour market, which so far has remained resilient in the face of this year’s slowdown in growth.”

To change this trend and get workers back to work, “we need to see a pivot in the behaviour of firms”, he adds. In his view, the only way firms have been able to tolerate weak productivity and the ensuing surge in unit wage costs is through being able to pass them on in higher prices, “otherwise margin would have been crushed as labour costs surged”.

Instead, Wade says, “firms have been beneficiaries of high inflation. As a result, whilst household cash flows are under pressure, the corporate sector is yet to see the sort of squeeze which would trigger a retrenchment.”

Accounting data shows the corporate sector is still running a financial surplus – in other words, internal cash flows exceed investment. Amid low unemployment, weakening productivity and rising unit wage costs, “companies do not look set to embark on a major retrenchment”, Wade suggests.

If companies keep passing on costs, then inflation will remain high.

Are there any signs of easing?

Some industries have been more affected than others. Semiconductor makers, for example, saw demand for chips surge because of greater demand for electric vehicles and increased automation of industrial processes. However, there are some signs of supply chain pressures within the sector easing. Aviva’s Saldanha notes that companies such as Volkswagen have seen semiconductor bottlenecks reduce somewhat, but it is still “clear these will take time to normalise. Indeed, we do not expect any significant normalisation of supply chains until well into 2023.”

Reasons to be optimistic include the easing of Covid restrictions in China and factories ramping up production. “Some industrial companies with a significant manufacturing footprint in China, such as Schneider Electric, have seen some benefit from a pick-up in capacity at factories in cities such as Shanghai,” adds Saldanha.

The supply chain crunch may have broader implications, such as industries looking to re-shore manufacturing facilities to meet local demands. In addition, the recently announced CHIPS (Creating Helpful Incentives to Produce Semiconductors) and Science Act in the US has been a critical driver for its semiconductor industry. However, says Saldanha, it will take a long time to make industries “better insulated in the future against what in many ways has felt like the perfect storm of events that have contributed to these bottlenecks”.

“For investors, whilst we do not expect these pressures to go away any time soon, there are finally some reasons for light at the end of the tunnel,” he adds.

That said, the problems generated by labour shortages and supply chain disruptions are not temporary and tend to have a long-lasting impact. Nick Clay, head of global equity income at Redwheel, says that the inflation brought about by supply chain issues, the desire to re-shore production, and excess debt levels, are likely “to remain more persistent than first feared”.

© 2022 funds europe



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