This has been the decade of supply chain disruptions and geopolitical tensions, causing delays in goods and elevated shipping costs. One only has to think back to the early 2020s, when pandemic-related disruptions in the supply chain demonstrated how interconnected everything is. For example, used car prices skyrocketed as chips to make many new cars became unavailable. While the risks of supply disruptions remain, an HSBC America analyst (NYSE:HSBA) has provided three tips investors should pay attention to.
Current Supply Chain Issues
Global trade has always had its share of supply chain issues. However, in recent years, just-in-time inventory control and non-substitutable components have been used for so many manufactured goods that an event in one corner of the globe can instigate repercussions in several other parts of the world.
According to a new report from HSBC, several factors put shipping at risk this year. One problem is the rising cost of borrowing money. Suppliers financing their shipments are having to pay far more in financing costs.
Also, specific geographic regions have issues that cause ships to alter their routes. These include drought affecting the Panama Canal and attacks in the Red Sea. HSBC also sees risk in the number of important elections taking place this year. With more than a quarter of the world’s population casting votes that could change leadership, shipping can be impacted.
One only has to listen to the top candidates in the U.S. presidential election to know that a new wave of protectionism is being discussed, as is a movement toward “Made in America.”
Insight for Investors
The pandemic exposed flaws and vulnerabilities in the supply chain. Many companies have since adjusted priorities with more emphasis on reducing the risk of a supply chain event. The goal in the past was easy to understand; companies were driven by the bottom line. They managed their supply needs with a heavy emphasis on lowering costs. The new trend has a new lean, from just-in-time to just-in-case. This has altered the company balance sheets of many businesses that rely on shipped goods.
To address this growing issue, HSBC America head of global trade solutions Marissa Adams, discussed the shipping changes in a video interview for Yahoo Finance, and pointed to three signs investors should look for related to how supply chain issues could impact stock holdings.
- First, Adams advises that its essential for senior leadership to discusses their supply chain plans for the coming year’s resiliency. It isn’t good if they are too focused on costs at the expense of perhaps winding up with nothing to sell for any period.
- Second, determine if the company is naturally vulnerable because they are concentrated in sectors that heavily rely on shipping from higher-risk regions. For instance, semiconductor production, which is primarily based in Taiwan, puts that sector at risk. If this is the case, listen for plans that the company you’re holding is making to build or tap into the new effort to build chips closer to where they are needed.
- Lastly, Adams noted investors should evaluate a company’s infrastructure investment and whether the company is investing in its supply chains so as to mitigate as much risk as possible.
Key Takeaway
Companies are paying more attention to potential supply chain woes, and investors should do the same. Even when a product is produced in the U.S., there’s a good chance there are essential components that arrived by ship from other parts of the world. This could impact investment portfolios as a high-flying company one day may find itself idled, waiting for a critical component.
HSBC suggests that investors ask themselves where the company sees risks. Investors should also learn what suppliers they are most dependent on and what countries they are in. Determine if these countries are in locations that are more prone to problems. And listen to make sure management is planning to help reduce potential problems.
