International commerce has been turned on its head by the novel coronavirus pandemic. Consumption patterns and supply chains may never be the same again.
The global economy slowdown triggered by the Covid-19 outbreak could cost at least $1 trillion (€870 billion) in growth, according to the World Economic Forum.
A widely held belief is that this crisis could lead to less globalisation in how products are manufactured and distributed to consumers due to the major disruption caused by government-imposed lockdowns.
Chris Kaminker, head of sustainable investment research and strategy at Lombard Odier Investment Managers, expects to see a prolonged shift in supply chains as businesses find new and closer-to-home solutions for critical sourcing.
“An example may be low value-added chemical components, suddenly deemed essential because they are the raw ingredients of basic off-patent drugs. We may see the same trend in food sourcing as we adjust to changing supply levels and face up to the fragility of our existing supply networks,” he tells Funds Europe.
“The automation of industrial processes, warehousing and solving logistics bottlenecks will all undoubtedly accelerate to cope with the new urgencies and are likely to remain a priority for businesses long after the pandemic.”
The pandemic has unearthed many faults in the modern world; some already known, some new. While the long-term socio-economic fallout of this crisis is yet to unfold, many businesses are already having to rethink entire manufacturing and distribution models.
According to Jamie Jenkins, co-head of the responsible global equities team at BMO Global Asset Management, we are well past the peak of globalisation and locating production in low-cost labour regions such as Asia or Latin America.
“Now national populations are going to require their governments to be more in control of their country’s own destiny, and that will require onshoring of production – whether it’s sanitiser, face masks, testing equipment or laboratory networks,” he says.
However, for Robeco’s global head of fundamental equities and senior portfolio manager for emerging markets, Fabiana Fedeli, more localised supply chains could prove detrimental.
“I would argue that the coronavirus will imply more diversification in our supply chains. You don’t want to be tied to one or more suppliers in the same location because if something happens in that location, your whole supply chain is completely distorted,” she argues.
“Many make the point about globalisation versus localisation. It’s more a matter of the need to diversify, and you need to diversify in terms of supply sources. That can be in terms of companies you supply from and, potentially, geographically.”
She points out, as an example, that if a company is only getting supplies from Italy, they are going to have a problem. “But if you are a textile company supplying from Italy and from China, next quarter you have a chance to get at least part of the products supplied to you.”
Looking forward, it remains to be seen how long this uncertainty may last, and what effect the crisis – which is causing financial hardship for millions worldwide – will have on consumption habits. Supply is nothing if there is not enough demand, after all, and faced by ongoing economic uncertainty, people are less likely to consume.
Yet, as we reach the halfway point of what has already proved to be a turbulent year on many levels, there is an often-shared sentiment within the investment community: proceed with cautious optimism.
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