- After decades of underinvestment and recent supply-chain challenges brought by the pandemic, both US companies and the federal government are now seeking to bolster domestic manufacturing.
- That support is likely to advance three key trends impacting the industry: sustainability, digitization, and onshoring.
- A US or global recession could dampen the short-term outlook but is unlikely to change the favorable longer-term prospects for some industrial companies.
The industrials sector may continue to be impacted in 2023 by many of the same near-term worries as other sectors—including, most pressingly, the increased risk of US or global recession.
Yet for clients with a long-term view, there are three key trends at play in the sector that have created opportunities for US-based industrial companies: digital technologies and processes, an increased focus on sustainability, and a revival of domestic production instead of globe-spanning supply chains.
Harnessing these opportunities will require sizable investments by these companies over the next decade and beyond, but I believe they are on the path to transforming their operations—and earnings—for the better.
Economic worries weighed on stocks in 2022
In the past year, the industrials sector was largely driven by the same concerns as the broad market. High inflation—and the implications of high inflation for interest-rate policy—weighed heavily on stocks. The sector largely tracked the broad market's performance for much of the year, though after a bounce in the fourth quarter was on track to outperform the S&P 500® for the year.
Source: Past performance is no guarantee of future results. Industrials sector performance is represented by the S&P Industrials Select Sector index. Data as of Dec. 9, 2022. Source: S&P Dow Jones Indices, a division of S&P Global.
While 2023 could bring more of the same worries, Fidelity is staying focused on the long-term potential opportunities created by some key undercurrents of change in the sector.
A coming dawn for domestic manufacturing?
US manufacturing has suffered from nearly four decades of underinvestment in plants, people, and equipment. The past few years have only highlighted vulnerabilities in the sector, with rising trade and geopolitical tensions between China and the West, and with pandemic-related supply problems causing unprecedented disruption for manufacturers.
Yet the silver lining to that not-so-rosy picture is that both US companies and the federal government are now seeking to bolster domestic manufacturing. New laws offer tax incentives and funding for certain industries. Broadly speaking, these measures are aimed at three areas: supporting sustainability, digitization, and onshoring.
These three themes now figure prominently in most companies' strategic plans and have created potential investment opportunities.
Theme 1: Sustainability
Manufacturing has relied on fossil-fuel energy since the first industrial revolution. Now, governments and investors are demanding that the sector change its sources of energy while also remaining cost competitive.
Switching to low-carbon energy sources will be technologically and economically challenging, especially for energy-intensive, heavy-industrial groups. However, the energy transition also offers significant opportunities for some US manufacturers.
For example, electric vehicles require far fewer workers for building and maintenance, which will likely reduce labor costs for those manufacturers. Both the 2022 Inflation Reduction Act and the 2021 Infrastructure Investment and Jobs Act included provisions intended to help hasten the adoption of electric vehicles.
Theme 2: Digitization
Around the world, manufacturers are investing in technologies they believe will enhance their competitiveness. Many companies are investing heavily in advanced robotics, in an effort to take advantage of smarter, more flexible, and more cost-effective equipment to automate more of their activities.
Digital investments—including artificial intelligence, cloud computing, and the so-called "internet of things" (meaning networks of physical devices that connect with one another)—are enabling meaningful improvements along multiple fronts for the industrials sector, including greenhouse-gas emissions, factory output, order-to-delivery lead times, speed to market, and customization.
Theme 3: Onshoring
Coming into the pandemic, many US companies relied on just-in-time delivery of components that often came from China and other faraway places. The pandemic completely disrupted this system. Across many industries—notably automobile manufacturing—companies were forced to curb production due to a lack of essential parts.
The upshot of this disruption is that companies are increasingly making plans to diversify and reinforce their supply bases and to bring supply chains closer to home, likely meaning more manufacturing facilities built in the United States, Mexico, and Canada. There could be significant potential opportunities for industrial companies aiding these efforts.
Looking beyond the near-term worries
While a US or global recession, should one occur, could slow the progress of these trends, it would be unlikely to derail them. The benefit of a long-term perspective is that we can look beyond the news of the day to focus on the economic forces shaping the world of tomorrow.