Investing: How to Play a Shifting Economy

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By Kim Clark From Kiplinger’s Personal Finance

U.S. companies prospered for decades as new markets opened for their goods and labor costs plummeted thanks to overseas production. But now, the pandemic and spreading political and military conflicts have stretched supply chains past the breaking point, prompting companies to bring many operations closer to home, says market strategist Ed Yardeni.

“Deglobalization was almost inevitable,” he says.

U.S. companies are starting to “reshore” production back to the United States, “near-shore” it to neighbors such as Mexico, or “friend-shore” it to allies such as Vietnam. Investment firm Piper Sandler counted more than 900 announcements of companies either building or expanding manufacturing facilities in the United States in the 12 months ending in May of 2022. In 2012, there were only about 100 such announcements.

Over the long term, companies should benefit from more-reliable processes. Yardeni predicts that among the biggest winners will be companies with economic bases in the United States that leverage cost-saving automation to offset higher wages and energy expenses.

Here are four companies that should benefit.

1. Ametek

Osterweis Capital Management is bullish on deglobalization—and on Ametek, a Pennsylvania-based manufacturer of precision instruments and electromechanical devices that should benefit from investments in productivity, says portfolio manager Larry Cordisco. Ametek has been buying up robotics and automation companies.

Ametek’s products range from remotely controlled motors for factories to data systems that help hospitals manage patient needs to robots used in applications as varied as embroidery, woodworking, spray painting and disinfecting. Joshua Aguilar, a senior analyst at investment research firm Morningstar, says the company’s move into the health industry is especially promising because so many hospitals have struggled with staffing shortages.

2. Applied Materials

Americans invented the computer chip. But many of the pioneering manufacturing plants in the United States couldn’t compete with lower-cost Asian fabrication facilities. By the start of the pandemic, the United States produced only about 12 percent of the world’s chips.

Now chip manufacturers are scrambling to produce more chips in the states. And Congress recently passed a bill to provide financial incentives to chip manufacturers. A good way to take advantage of this coming boom in chip production is to look at suppliers to chip manufacturers, says Todd Ahlsten, chief investment officer for Parnassus Investments. He has bought up shares of Applied Materials, which, among other things, makes the equipment needed to etch circuits onto the silicon wafers used as the base for chips.

3. Lincoln Electric

Another pick from Osterweis Capital is Cleveland-based Lincoln Electric, a leader in robotic welding that is benefitting from the reshoring trend. Lincoln gets about 60 percent of its revenue from U.S. customers and another 20 percent from Europe.

Lincoln has been beefing up its welding automation business, notes Baird senior research analyst Mircea Dobre, who recommends the stock. Automation accounted for about 15 percent of the company’s sales in 2021 but was rising at twice the rate of its more-traditional manual welding equipment and was on track to nearly double sales to $1 billion by 2025, he says.

4. Union Pacific

Companies may be pulling back from China and Russia, but that doesn’t mean they will return only to the United States. Instead, Adam Posen, president of the Peterson Institute for International Economics, expects a “corrosion of globalization” to boost commerce among allied or friendly countries, with many manufacturers moving production to low-wage countries either geographically or politically closer to large consumer markets. Mexico could be one of the biggest beneficiaries of such near-shoring and friend-shoring, Posen says.

Parnassus’s Ahlsten says that’s why he likes Union Pacific stock. “We see deglobalization as a big trend, which has led us to invest in railroads that connect the United States with Canada and Mexico, such as Union Pacific,” he says. The storied railroad company has a 26 percent ownership stake in Ferromex, Mexico’s largest railroad. Union Pacific also controls the major railroad ports of entry on the U.S.-Mexico border and moves 70 percent of all freight rail traffic to and from Mexico.

(Kim Clark is a senior associate editor at Kiplinger’s Personal Finance magazine. For more on this and similar money topics, visit Kiplinger.com.)

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