Richard Bernstein Tactical Series, American Industrial Renaissance®, 2018-3
A variety of factors are driving the manufacturing renaissance in the United States. Slower growth in hourly compensation compared to some global competitors and lower natural gas
and electricity prices are leading the U.S. to become one of the lowest-cost countries for manufacturing in the developed world, according to Boston Consulting Group (BCG). We
believe the U.S. will have a competitive advantage over other countries, which could potentially allow U.S. industrial and manufacturing companies to gain market share.
For many decades, American companies sent their
manufacturing work overseas. But today, in a trend
known as “reshoring,” many companies are bringing
their manufacturing back to the U.S. The ISM
Manufacturing Index reached 57.7 in October, which
indicates growth in manufacturing for the 26th
consecutive month. Thirteen out of 18 manufacturing
industries reported growth. The October 2018 ISM
Employment Index was at 56.8%, which indicates a
growth in employment in October for the 25th
consecutive month. Despite fears of trade wars and
workforce shortages, U.S. manufacturers have
continued hiring. The manufacturing sector has added
around 32,000 jobs in October, with a total of 296,000
over the past year. This gain in manufacturing jobs is
the result of both new reshoring and Foreign Direct
Investment (FDI) by foreign companies into our
manufacturing sector. In addition, for the sixth year in a
row, business leaders around the world have chosen the
U.S. as the number one place to invest (see Chart 1).
According to an A.T. Kearney survey of corporate
executives, the U.S. is perceived as a bedrock of
stability. Investors are optimistic about solid U.S.
fundamentals, including an increasingly competitive
workforce and improving cost factors that are helping
the U.S. business environment.
Richard Bernstein Advisors believes the following four factors point to the U.S. gaining industrial market share over the next five to ten years:
Wages and Productivity
American workers are increasingly willing to work for
less while labor costs in low-cost countries, such as China, are on the rise. The wage lag
is a key factor contributing to the rebounding competitiveness of U.S. industry.
According to Forbes, the modern Chinese economy, which was built based on its
competitive advantage in manufacturing, has experienced a consistent year-over year
deceleration due to an exodus of manufacturers after seeing wage increases of
approximately 80% since 2010.
Although the absolute level of wages in the emerging markets remains less than that in the
United States, the gap has been closing. According to BCG, cost structures in Mexico and the
U.S. improved more than in all of the other 25 largest exporting economies. Because of low
wage growth, sustained productivity gains, stable exchange rates and a big energy-cost
advantage, these two nations are the current rising stars of global manufacturing. Of
course, there can be no assurance that these trends will continue.
Quality Control, Transportation Costs and Decreased Time to Market
Some companies that have already begun to reshore have cited the benefits in having
designers, engineers and sales people at the same facility rather than oceans apart.1 The
cost of shipping parts around the world and the associated time to market can create
hidden costs that may negatively impact both profit margins and market share.
1 Source: A.T. Kearney
Natural gas had long been the
second-most prevalent fuel for electricity generation
behind coal. According to the U.S. Energy Information
Administration, natural gas-fired generation first
surpassed coal generation on a monthly basis in April
2015. Natural gas-fired generation has surpassed coalfired
generation in most months since then. In 2017,
natural gas had the largest percentage contribution to
electricity generation at 31.7%, coal contributed 30.1%
and nuclear rounded out the top 3 at 20.0%.
The Potential Advantage for Small Banks
Large U.S. banks have strayed from traditional lending
sources of income toward more risky sources of return,
for example, investing in corporate bonds rather than
making corporate loans, according to Richard Bernstein
RBA believes it may be prudent to avoid the larger banks
until they return to their traditional income-oriented
roots. In contrast, smaller U.S. banks generally have
strengthening balance sheets and continue to aid U.S.
capital formation. Admittedly, traditional banking
typically has lower profitability ratios, but smaller U.S.
banks do not need massive trading infrastructures and
unnecessary global risk-taking to be profitable. Manufacturing is a capital-intensive business that requires equipment, tooling and raw materials. For the manufacturing renaissance
to come to fruition, RBA believes manufacturers will turn to smaller banks for the financing required to hire more workers, buy new equipment and aggressively market themselves.
|The Richard Bernstein
Advisors Tactical Series,
Renaissance®, is a unit
investment trust (UIT) which
seeks above-average capital
appreciation by investing in
small- and mid-cap U.S.
companies in the industrial
and community banking
sectors. The stocks are selected
for the trust by Richard
Bernstein Advisors using a
comprehensive process and held
for approximately two years.
There is no assurance the
objective of the trust will be met.
| Not FDIC Insured Not Bank Guaranteed May Lose Value
You should consider the portfolio's investment objectives, risks, and
charges and expenses carefully before investing. Contact your financial advisor
or call First Trust Portfolios, L.P. at 1.800.621.1675 to request a prospectus,
which contains this and other information about the portfolio. Read it carefully
before you invest.
An investment in this unmanaged unit investment trust should be made with an understanding of the risks involved with owning common stocks, such as an economic recession and the possible deterioration of either the financial condition of the issuers of the equity securities or the general condition of the stock market.
You should be aware that the portfolio is concentrated in stocks in the industrials sector making it subject to additional risks, including limited diversification. The companies engaged in the industrials sector are subject to certain risks, including a deterioration in the general state of the economy, intense competition, domestic and international politics, excess capacity and changing spending trends.
The trust also invests in companies in the financials sector. The companies
engaged in the financials sector are subject to the adverse effects of
volatile interest rates, economic recession, decreases in the availability of
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potential increased regulation.
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and certain mid-cap companies are often more volatile than those of
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