Breaking down the ‘bottleneck recession’

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GAM Investments’ Thomas Funk discusses what has sparked a ‘bottleneck recession’ and comments on the implications for manufacturing companies.

05 January 2022

Supply bottlenecks for industrial goods are becoming an ever-greater problem, morphing into what the ifo Institute for Economic Research has described as a ‘bottleneck recession.'1 The situation worsened in October, with industrial intermediate products becoming scarce at many levels. There are several reasons for this. Not least because goods for the Christmas season are stifling transport capacity. Moreover, logistics chains, especially in international trade, are still not functioning efficiently. For example, large container ships are jammed outside ports and urgently needed goods cannot be unloaded. As some inventories are depleted, this increasingly causes production stoppages. This is most obvious in two areas: automobile production and electrical goods manufacturing. For 2021, forecasts for car production have constantly been revised downwards. In some factories, production has been stopped at short notice because of a shortage of electronic components. Apple has also had to cut production of the latest generation of mobile phones.

Landis+Gyr, a Swiss manufacturer of electricity meters and utilities-related software, recently published a list of electronic products that are currently in short supply, and it is remarkable. 2 First and foremost, as expected, semiconductor-based products are in short supply, which is leading to a boom in the construction of new semiconductor factories. However, surprisingly, simple electronic components such as diodes and transistors appear on Landis+Gyr’s list. It is hard to imagine that there was a sudden shortage of such components during the Covid-19 pandemic. It is much more likely, in our view, that they were left somewhere in the logistics chain, forming a stock that could not be called up, was temporarily withdrawn from the value chain, and is now missing. As a result of these bottlenecks, some manufacturing companies face lower turnover over the coming months. In terms of profit development, we therefore expect a slowdown in profit momentum at various manufacturing companies – in other words, a ‘bottleneck recession’.

It is important to note that the end demand for products remains intact. Households have been saving during the Covid-19 lockdowns, meaning substantial funds for consumption exist, and this has fed through to sales. Since mid-2020 most companies have been on a recovery path as they recaptured lost sales during the pandemic. Now, we believe the range in profit developments is likely to increase, especially because of the shortage of industrial intermediate products. However, the earnings shortfalls caused by the bottleneck recession will likely lead to pent-up demand that can be worked off as soon as intermediate products are available again. It is important not only to focus on the problems but also to make investments to boost business in the medium and longer term. We see examples of strong companies making investments in research and development, new products and capacity expansions to better position themselves and capture new sources of future income.

2Landis+Gyr, Half Year FY 2021 Earnings Presentation 28 October 2021
Important legal information
The information in this document is given for information purposes only and does not qualify as investment advice. Opinions and assessments contained in this document may change and reflect the point of view of GAM in the current economic environment. No liability shall be accepted for the accuracy and completeness of the information. Past performance is no indicator of current or future trends. The mentioned financial instruments are provided for illustrative purposes only and shall not be considered as a direct offering, investment recommendation or investment advice. Reference to a security is not a recommendation to buy or sell that security. The securities listed were selected from the universe of securities covered by the portfolio managers to assist the reader in better understanding the themes presented. The securities included are not necessarily held by any portfolio or represent any recommendations by the portfolio managers.

Thomas Funk

Investment Director
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