Localizing production within a developed nation should mean upward pressure on prices given rising input costs, which has the ultimate effect of eroding disposable income. This effect could be partly offset with higher domestic wages given the expected increase in demand for domestic workers. How these forces ultimately play out will likely vary by location and sector.
Some sectors of the economy may be able to dampen the effect of higher labor costs through increases in productivity such as automation. This could be a boon for business investment and productivity growth but will likely vary by sector.
Regionalization May Have Far-Reaching Impacts On Parts Of The Corporate Credit Market
Fixed income investors, such as those invested in Core or Core Plus strategies, are partly invested in large, investment grade multinational corporations that have benefited from the hyper-globalization of recent years. Over the next decade, the impact of regionalization is likely to have long-term impacts on their fixed-income portfolios. However, these effects are unlikely to be uniform across all sectors or by individual credit.
At Insight, we believe fixed-income investors need to consider managers that focus on bottom-up fundamental analysis and are highly selective in their investment approach. Studying fundamentals can help investors understand how business’ supply chains are evolving, the intentions of management teams and the likely effect on credit metrics.
In our view, it is the diligent investors that will be best placed to maximize the opportunities of regionalization while avoiding the pitfalls.
James DiChiaro is senior portfolio manager at Insight Investment.