The way to invest in the American manufacturing renaissance

Nov 14, 2013 @ 12:00 am

Runtime: 3:54

Charles Schwab's chief investment strategist Liz Ann Sonders breaks down how manufacturing in the United States has rebounded, and looks at ways investors can buy into the industry's recovery.

Exclusive coverage of Charles Schwab's IMPACT 2013 conference from November 10-13 in Washington, D.C.

Video Transcript

I have had more questions here and recently by advisers, by retail investors, by the media in the last couple of weeks about whether we're in some sort of bubble, whether we are facing valuation excess. Frankly, I'm not quite sure I understand what the fuss is all about other than maybe muscle memory of the two most recent financial crises and valuation bubbles in the case of 2000 and maybe people are tuned to making sure we're not gonna miss the next one, but I think worrying about it at this stage particularly from a valuation standpoint, I'm not trying to understand 'cause I think the market is at no worse than reasonably value. The biggest bright spot within the economy right now is what's happening-- related to what's happening with both energy and traditional manufacturing. So, we have a renaissance in both. I think most people are very aware of the energy boom, but that's feeding into a resurgence in manufacturing and competitiveness because it sucks up the United States particularly now that we are the world's largest energy producer. We have abundant access at a very low cost to energy that lowers the cost of everything else that makes us geopolitically safer. At the same time, the gap that has existed for decades between the United States and many emerging markets, particularly China, especially the wage gap, has narrowed significantly in the last several years. And then, you add additional costs, whether it's real estate cost of setting up business over in emerging markets, again, particularly China, shipping energy costs. You add those all together and the gap has narrowed sufficiently. Now, the business is starting to reshore to the U.S. and not only that but non-U. S. companies are looking to set up shops. So, I think we're on our way to becoming a manufacturing sort of powerhouse again and much more of an export powerhouse. And it doesn't-- it doesn't right the ship immediately. It's kind of a slow moving thing, but I think it's the most optimistic thing we can view inside our economy right now. Manufacturing as a share of GDP has actually grown for three years in a row, admittedly up off of a low base. It's only about 13% of our economy. But three consecutive years of growth, that's the first time that's ever happened in post-World War II history. In fact, for much of the past 40 years, each year, manufacturing trunk has a share of our economy, but now, it's had three consecutive years of growth. Manufacturing average work week has set an all-time high. If you look at the more manufacturing-oriented states or energy-oriented states, in some cases combined, they're crushing the national average in some things like job growth, decline in the unemployment rate. So, you are already seeing it in those states that are really in the heart of this and I think you'll start to see it more broadly in the economy. I am gonna now say something that I don't normally say which is, I'm not so sure, the way to play the manufacturing renaissance is necessarily by buying what we might generally think of us manufacturing companies. I think the best-- from a sector perspective, the best opportunities would be in the industrial sector, consumer discretionary because part of this theme is the commodity supercycle on the upside having ended back in 2011. So, that accrues very much to the benefit of consumption-oriented economies which clearly the United States is, so consumer discretionary stocks, and then, we're also a big believer that we've got a tremendous amount of pent-up demand from a capital spending perspective and that should feed also directly into technology companies, so a lot of cash sitting on the sidelines, all of the leading indicators for capital spending starting to kick in. So, clearly, with those three sectors, very much a cyclical orientation to where we think money can be made.


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