Morgan Stanley picks stocks amid supply chain crisis
On November 22, 2021, cargo containers were stacked up on a ship in Bayonne (New Jersey).
Spencer Platt | Getty Images
Morgan Stanley reported that the majority of acute supply chain disruptions were already under control and should be fully addressed by 2022’s first-half.
This is the basis case that the bank presented in its recent assessment of the global supply chain and the risks it faces.
The supply chain crisis of this year has been devastating for companies. There were bottlenecks and insufficient industrial production to keep up with the demand spike after the pandemic. Energy shortages in China and EuropeThe huge supply chain squeeze has been caused by both Covid lockdowns as well as a lack of Covid.
Even though the world continues to assess supply chains, they remain highly vulnerable. the risk of new omicron strains, Morgan Stanley said.
“However, orders have surged“Increased anxiety over sourcing products, this inflates backlogs, setting the scene for an even sharper-than-expected short term unwind, especially for consumer electronics, and segments facing demand destruction risc,” analysts at the bank wrote in their Dec. 14 report.
Morgan Stanley predicts that logistic costs will continue to be “significantly more expensive” in 2022 and remain so throughout the year. Travel restrictions, such as quarantine, are not likely to be relaxed for important transcontinental routes. They will remain in place through 2022. However there is limited capacity before 2023.
Morgan Stanley cautions companies that produce tech hardware against those who have a high backlog and limited visibility as to when the demand will rise. It prefers to see semiconductor businesses exposed to both industrials and automobiles.
The investment firm identified companies it says are “regional champions,” “recognizing their importance to supply chains and the role that policymakers may play … to support their position against competitive pressures from other spheres of influence.”
The report stated that while these companies are prominently featured in the global supply chain problems of 2020/21 but, broadly speaking, we also saw them showing stronger profitability trends than the MSCI ACWI global benchmark and substantially outperform the MSCI ACWI equity benchmark. MSCI ACWI includes stocks from both the MSCI World and emerging market indices.
These stocks are Morgan Stanley’s top picks for being “central” in supply chains.
- Tech: Apple, HP, Cisco, Lenovo, Fujitsu, Hitachi
- Semiconductors: Samsung Electronics, Intel, Infineon Technologies, NVIDIA
- Automobiles and their components Volkswagen, Ford Motor, Daimler, General Motors, BMW, Tata Motors, Renault, Hyundai Motor, Continental
- Software: Microsoft, IBM, DellSAP
- Insurance: Berkshire Hathaway
- Consumer: Sony, Panasonic, LG Electronics
- Retail: Amazon
- Capital goods: Volvo AB, Siemens
Morgan Stanley listed also the top-pressured companies that were affected by supply chain disruptions.
According to the firm, “Industries falling into this category are those most sensitively transmitting the squeeze on supply chain pressures. This is partly because these companies face continued reliance upon labor inputs in the face of increasing automation or capital investments.”
This, together with other factors, such as the reliance upon markets that are subject to trade frictions or geopolitical dynamics, “leaves such businesses vulnerable to both geopolitical, labor, and global supply chain dynamics,” the report said. Container shipping, and firms that produce semiconductors are just two examples.
Morgan Stanley reports that while such firms are likely to be subject to increased cost pressures, their pricing power is still maintained by the fact they have strong industry positions.
These are stocks that belong to the “bottleneck” group.
- Semiconductors: Infineon, ST Microelectronics, NXP Semiconductor, Microchip Technology, Texas Instruments, Analog Device, ON Semiconductor, Globalfoundries, Nuvoton Technology, Nanya Technology
- Tech: BYD Electronics, Wingtech Technology, Unimicron, Kinsus Interconnect Tech, Nan Ya PCB
- Equipment for networking: Lumentum, II-VI, Corning, CommScope
Morgan Stanley stated that there is limited recourse to price increases to offset higher input costs and to ration capacities through backlogs in the face disruptions.