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Industrials: A new dawn for US manufacturing?

Key takeaways

  • After decades of underinvestment and recent supply-chain challenges brought by the pandemic, both US companies and the federal government are now seeking to bolster domestic manufacturing.
  • That support is likely to advance 3 key trends impacting the industry: sustainability, digitization, and onshoring.
  • A US or global recession could dampen the short-term outlook but is unlikely to change the favorable longer-term prospects for some industrial companies.

The industrials sector may continue to be impacted in 2023 by many of the same near-term worries as other sectors—including, most pressingly, the increased risk of US or global recession.

Yet for investors with a long-term view, there are 3 key trends at play in the sector that have created opportunities for US-based industrial companies: digital technologies and processes, an increased focus on sustainability, and a revival of domestic production instead of globe-spanning supply chains.

Harnessing these opportunities will require sizable investments by these companies over the next decade and beyond, but I believe they are on the path to transforming their operations—and earnings—for the better.

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Economic worries weighed on stocks in 2022

In the past year, the industrials sector was largely driven by the same concerns as the broad market. High inflation—and the implications of high inflation for interest-rate policy—weighed heavily on stocks. The sector largely tracked the broad market's performance for much of the year, though after a bounce in the fourth quarter was on track to outperform the S&P 500® for the year.

Chart shows 2022 year-to-date performance for the industrials sector and for the S&P 500.  As of December 9, industrials sector stocks had lost 5.1% at the index level, compared with the S&P 500's 16.17% loss year-to-date on a total return basis.
Past performance is no guarantee of future results. Industrials sector performance is represented by the S&P Industrials Select Sector index. Data as of Dec. 9, 2022. Source: S&P Dow Jones Indices, a division of S&P Global.

While 2023 could bring more of the same worries, I'm staying focused on the long-term potential opportunities created by some key undercurrents of change in the sector.

A coming dawn for domestic manufacturing?

US manufacturing has suffered from nearly 4 decades of underinvestment in plants, people, and equipment. The past few years have only highlighted vulnerabilities in the sector, with rising trade and geopolitical tensions between China and the West, and with pandemic-related supply problems causing unprecedented disruption for manufacturers.

Yet the silver lining to that not-so-rosy picture is that both US companies and the federal government are now seeking to bolster domestic manufacturing. New laws offer tax incentives and funding for certain industries. Broadly speaking, these measures are aimed at 3 areas: supporting sustainability, digitization, and onshoring.

These 3 themes now figure prominently in most companies' strategic plans, and have created potential opportunities for investors.

Theme 1: Sustainability

Manufacturing has relied on fossil-fuel energy since the first industrial revolution. Now, governments and investors are demanding that the sector change its sources of energy while also remaining cost competitive.

Switching to low-carbon energy sources will be technologically and economically challenging, especially for energy-intensive, heavy-industrial groups. However, the energy transition also offers significant opportunities for some US manufacturers.

For example, electric vehicles require far fewer workers for building and maintenance, which will likely reduce labor costs for those manufacturers. Both the 2022 Inflation Reduction Act and the 2021 Infrastructure Investment and Jobs Act included provisions intended to help hasten the adoption of electric vehicles.

Companies at the forefront of these changes may see potential benefits. For example, Honeywell () is a diversified technology and manufacturing company that is leaning into energy transition efforts and has a strong presence in energy-efficient, nonresidential construction.

Theme 2: Digitization

Around the world, manufacturers are investing in technologies they believe will enhance their competitiveness. Many companies are investing heavily in advanced robotics, in an effort to take advantage of smarter, more flexible, and more cost-effective equipment to automate more of their activities.

Digital investments—including artificial intelligence, cloud computing, and the so-called "internet of things" (meaning networks of physical devices that connect with one another)—are enabling meaningful improvements along multiple fronts for the industrials sector, including greenhouse-gas emissions, factory output, order-to-delivery lead times, speed to market, and customization. One example of a recent portfolio holding that illustrates this theme is Ametek (), a provider of innovative power, testing, and automation equipment.

Fund top holdings*

Top-10 holdings of the Fidelity® Select Industrials Portfolio () as of October 31, 2022:

  • 9.7% – Roper Technologies Inc. ()
  • 7.0% – Fortive Corp. ()
  • 6.6% – WillScot Mobile Mini Holdings ()
  • 5.8% – Ametek Inc. ()
  • 5.4% – Teledyne Technologies Inc. ()
  • 5.3% – Crane Holdings Co. ()
  • 5.3% – Honeywell International Inc. ()
  • 4.5% – Raytheon Technologies Corp. ()
  • 4.5% – Howmet Aerospace Inc. ()
  • 4.1% – Transdigm Group Inc. ()

(See the most recent fund information.)

Theme 3: Onshoring

Coming into the pandemic, many US companies relied on just-in-time delivery of components that often came from China and other faraway places. The pandemic completely disrupted this system. Across many industries—notably automobile manufacturing—companies were forced to curb production due to a lack of essential parts.

The upshot of this disruption is that companies are increasingly making plans to diversify and reinforce their supply bases, and to bring supply chains closer to home, likely meaning more manufacturing facilities built in the US, Mexico, and Canada. There could be significant potential opportunities for industrial companies aiding these efforts. For example, WillScot Mobile Mini () is a provider of workspace and portable storage solutions that could benefit from any surge in nonresidential construction.

Looking beyond the near-term worries

While a US or global recession, should one occur, could slow the progress of these trends, it would be unlikely to derail them. The benefit of a long-term perspective is that I can look beyond the news of the day, to focus on the economic forces shaping the world of tomorrow.

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Before investing, consider the funds' investment objectives, risks, charges, and expenses. Contact Fidelity for a prospectus or, if available, a summary prospectus containing this information. Read it carefully. * Any holdings, asset allocation, diversification breakdowns or other composition data shown are as of the date indicated and are subject to change at any time. They may not be representative of the fund's current or future investments. The Top Ten holdings do not include money market instruments or futures contracts, if any. Depository receipts are normally combined with the underlying security. Some breakdowns may be intentionally limited to a particular asset class or other subset of the fund's entire portfolio, particularly in multi-asset class funds where the attributes of the equity and fixed income portions are different. Under the asset allocation section, international (or foreign) assets may be reported differently depending on how an investment option reports its holdings. Some do not report international (or foreign) holdings here, but instead report them in a "Regional Diversification" section. Some report them in this section in addition to the equity, bond and other allocation shown. Others report international (or foreign) holding as a subset of the equity and bond allocations shown. If the allocation without the foreign component equals (or rounds to) 100%, then international (or foreign) is a subset of the equity and bond percentage shown.

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References to specific securities or investment themes are for illustrative purposes only and should not be construed as recommendations or investment advice. This information must not be relied upon in making any investment decision. Fidelity cannot be held responsible for any type of loss incurred by applying any of the information presented. These views must not be relied upon as an indication of trading intent of any Fidelity fund or Fidelity advisor. Investment decisions should be based on an individual's own goals, time horizon, and tolerance for risk. This piece may contain assumptions that are "forward-looking statements," which are based on certain assumptions of future events. Actual events are difficult to predict and may differ from those assumed. There can be no assurance that forward-looking statements will materialize or that actual returns or results will not be materially different from those described here.

Past performance is no guarantee of future results.

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Stock markets are volatile and can fluctuate significantly in response to company, industry, political, regulatory, market, or economic developments. Because of its narrow focus, sector investing tends to be more volatile than investments that diversify across many sectors and companies. Sector investing is also subject to the additional risks associated with its particular industry. Industrials industries can be significantly affected by general economic trends, changes in consumer sentiment and spending, commodity prices, legislation, government regulation and spending, import controls, and worldwide competition, and can be subject to liability for environmental damage, depletion of resources, and mandated expenditures for safety and pollution control. The S&P 500® Index is a market capitalization-weighted index of 500 common stocks chosen for market size, liquidity, and industry group representation to represent US equity performance. The S&P Industrials Select Sector index comprises those companies included in the S&P 500 that are classified as members of the industrials sector, with capping applied to ensure diversification among companies within the index.

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