The RSMR Weekly Broadcast - supply & demand: the mismatch & the fallout

There's no shortage of knowledge and expertise at RSMR! Each week we get our heads together and talk about events in the world and how investments are affected by them. Our broadcast tackles a wide range of issues facing investors from green gilts to the global shipping crisis and bot extortion to the legislation of tech giants. We like to think of it as cracking content for the financial adviser. Have a read & get clued up...

Are you desperately trying to get your hands on the Playstation 5 or the Xbox Series X/S? You’re on numerous waiting lists but you still haven’t had any joy? If it’s any consolation, you’re not alone, there are some seriously annoyed console hunters out there! As well as being very frustrating, this has important ramifications across a wide range of industries.

Semiconductor demand was very strong in 2020 but is now facing significant supply constraints as so many industries rely on ‘chips’. Demand has exceeded supply and the industry needs to ramp up capacity levels to cope. There just aren’t enough chips to go around, causing misalignment across the technology industry. Demand for consoles is expected to outstrip supply for the foreseeable future but manufacturers are planning to expand capacity in the second half of the year.

What’s causing this mismatch? The availability and distribution of chips; manufacturing ability hindered due to the pandemic; greater demand and targeted bulk buying. The lull in global manufacturing reached crisis point during 2020 with container ships stranded outside ports all over the world. This scenario has now flipped as the big catch up begins and there aren’t enough container ships to go around. Added to this, there’s even more product to ship as the rebuilding of inventory around the world gets underway. Market manipulation makes this worse as bulk buyers snap up products that are in great demand so they can re-sell them at much higher prices.

The delay in supply chains feeds global inflation and the demand for specific products is a key contributor. We’ve been talking about consoles, but the same scenario applies to a wide range of products and sectors. Some businesses have managed to adapt to increased demand during the pandemic, generally those with a robust and agile business model – the supply chain for supermarkets has held up despite incredible strain and prices haven’t skyrocketed, but other sectors have been seriously affected because shortages have now reached extreme levels. 

As we identified in a previous broadcast, these imbalances can lead to inflationary pressure. The inflationary environment is never uniform, it’s driven by supply and demand, and will fluctuate as lockdown is lifted. The hospitality sector has had a lot of support from the government and is likely to get a boost as we come out of lockdown. Businesses that have made it to the other side will have a lot of catching up to do. Many people have saved during lockdown and there’ll be a real desire to get out there and spend, and perhaps pay more to enjoy these previously forbidden fruits, providing income for businesses for the first time in a long time. The strong will inevitably get stronger due to robust business models, reduced competition, and the spike in demand.

The UK holiday market has different forces at play. Many holiday makers have moved their bookings from last year meaning they’ll benefit from the previous year’s prices. Availability in the market generally will be reduced because of this and on the flip side, there’ll be newcomers to the market who’ve switched their plans from abroad to the UK this year. Reduced availability and greater demand could send prices higher.

Another example is in the resources market where certain materials which are in high demand but have limited supply, such as copper and palladium, have gone up in value due to the move towards electric cars and the need for lockdown home improvements. These price hikes are no doubt here to stay and will gather momentum as the year progresses and the true supply and demand picture emerges.

What will the inflation map look like over the next 12 months and what kind of control do we have over it? The US Federal Reserve believe an upswing in inflation will happen in this environment and if it does, they’re going to let it run. They’ve indicated that they’ll support the expansion and keep monetary policy loose. How far will they let it go? If they do increase interest rates and yields creep up in the fixed interest markets, there’s also likely to be an effect on equities.  A rising yield environment is a worry as the rate of discount on future earnings increases. Inflation can be negative for both equity and bond markets and governments need to be mindful of how it will affect the key asset classes.

One thing is clear, we won’t walk away from the economic devastation caused by the pandemic without repaying the accumulated debt. Inflation is a worrying by-product of improving growth, but it will help the government pay down the debt quicker. Although it looks unlikely at the moment, the battle between supply and demand can create cost push inflation led by wage demands. Conversely, structural change with technology cutting costs, and current employment data which indicates high levels of unemployment, are both disinflationary. Which side will win? The balance will keep changing but we could see increased inflation if the world economy ramps back up. It looks like we’ll have to keep waiting for that illusive Playstation 5, and for the true inflationary picture to reveal itself over the coming months.   

QUIZ QUESTION: How many people are into gaming in the UK?

LAST WEEK'S ANSWER: The term ‘inflation’ comes from the Latin word ‘inflare’ meaning to inflate and it reflects the fact that prices are inflated.