Investing in multi-year supply–demand imbalances in a world ripe with disruption
Markets rarely contend with uncertainty in isolation. Today’s environment is shaped by a convergence of forces including rapid technological change, shifting trade dynamics, and heightened geopolitical tensions. Events unfolding in the Middle East has added volatility to energy markets, supply chains, and investor sentiment more broadly. In moments like these, it is natural for near‑term developments to dominate attention.
When the backdrop feels unsettled, the challenge for investors is not simply reacting to events as they unfold but deciding where to anchor perspective. There is an old trick to avoiding seasickness. When the waves pick up, and the boat is tossing, keep your eyes on the horizon. The same advice may help investors as well. The size and ferocity of the waves may be provoked by different drivers, but steadying on a longer view tends to prove beneficial.
In the last year, business leaders have contended with a series of important external factors. Tariffs and currency movements influenced decision making, though neither has posed an existential challenge. Plus, the pandemic provided practice in terms of shifting operations to best handle changing trade or supply chain dynamics.
AI has quickly become the biggest force, reshaping how investors and executives assess intrinsic value. Leaders are asking hard, unavoidable questions: how will AI help, or hurt? Could it alter demand for energy or reshape entire industries? The list of implications is long, and the answers are far from clear. Having invested through the development of the internet, we know when game changing technology hits, new players emerge, and some players get benched. However, Artificial Intelligence is arguably the most difficult technological development to project impact.
There is an investment adage that states: short term the stock market is a voting machine, long term it is a weighing machine. However, to assess a company’s long‑term ability to create future value, high conviction matters. We often find conviction in opportunities that sit squarely in a “supply versus demand” imbalance, where we have conviction in the demand drivers, and deep understanding of supply constraints. When we find these opportunities, waiting for the “weighing” could be well worth it. This is where active management shows its strength.
Backlogs can drive fundamentals
For some industries today, order backlogs are expanding faster than manufacturing throughput. In many cases, order visibility has stretched years into the future, and in certain verticals, backlogs approach the equivalent of nearly a decade of production. This is reshaping balance sheets, cost curves, and investment cycles. The result:
- Revenue streams are becoming more predictable, tied to long lead infrastructure
- Incremental margins are rising as product mix improves, and pricing power strengthens
- Free cash flow remains resilient, despite higher working capital needs
These dynamics are giving rise to a set of investment opportunities tied to supply/demand imbalances. They move investors away from the most challenging AI debates and toward large, durable currents of demand, outpacing supply solutions may matter just as much as technological innovation. While the most challenging AI debates may steal headlines and drive volatility, investors may find positioning towards these durable currents of demand, where supply is tight, could offer an alternative.
Aerospace aftermarket: structural tightness
Across the global aerospace aftermarket, demand continues to outpace capacity for heavy maintenance, repair, and overhaul. Airlines are operating older fleets for longer, and utilization remains above historical averages. The imbalance is being shaped by key dynamics:
- High service intensity: Aging aircraft operating at elevated flight hours require deeper and more frequent shop visits.
- Labor and parts constraints: Skilled technicians are scarce, and long lead times for specialized components keep turnaround windows extended.
- Pricing power: With capacity constrained, service pricing remains firm, particularly for high-value work-scopes where mix benefits are strongest.
Together, these dynamics may create a multi-year path of above-trend returns for companies with large installed bases and technical depth in servicing complex propulsion and systems architectures.
Rearmament drives demand, supply is constrained
Across Europe and Asia, defense ecosystems are confronting their deepest capacity shortfalls in decades, as defense spending accelerates, demand for equipment, munitions, land systems, and naval platforms significantly exceeds current production capabilities.
- Exceptionally long backlogs—in several categories stretching eight to nine years into the future.
- Timing volatility driven by qualification cycles, supply chains, and new program ramp ups
- Structural upward pressure on margins due to mix shift toward faster growing, higher intensity categories
Importantly, recent downward revisions in certain subsegments have stemmed from timing complexities and the integration of new assets, not from weakening demand. Long‑dated spending commitments and ongoing platform modernization point to a cycle with considerable durability.
Semiconductors & semiconductor equipment: bottlenecks in the AI race
In the semiconductor ecosystem, non US producers remain at the center of enabling global AI, high performance computing, and next generation memory.
- Rising lithography intensity, as advanced nodes adopt more complex structures
- Acceleration in memory investment, particularly for high bandwidth architectures used in AI
- Longer lead times for critical tools, with order intake running well ahead of expectations
- Specialized supplier ecosystems with single source components (e.g., optics, precision modules) that cannot be quickly duplicated
Some semiconductor equipment categories are effectively in structural short supply. In these areas, intellectual property is a key competitive advantage, supporting pricing strength and the potential for durable margin uplift among the ecosystem’s most capacity-constrained players.
Power infrastructure (generation and transmission)
Electrification, driven by data center expansion, renewable integration, industrial automation, and EV adoption, is placing sustained pressure on power systems across Europe and Asia.
Grid equipment providers now face extended delivery schedules due to:
- Multi-year approved vendor backlogs
- Long installation and commissioning cycles
- Rising specification complexity for power quality and high density applications
AI related load growth is also accelerating the need for mid and high voltage build outs, reinforcing the structural tightness in this ecosystem. Manufacturers of power distribution systems, automation platforms, and data‑center electrical architectures are seeing demand that far exceeds current production capacity.
Companies offering integrated hardware software solutions stand to benefit the most, as customers increasingly seek end to end systems that deliver reliability, faster time to power, and greater energy efficiency.
Meanwhile, heavy duty gas turbines have entered a global multi-year order cycle. Backlogs in some regions now exceed four years of output, supported by:
- Strong baseload demand
- Higher service agreements following turbine completion
- Fleet modernization and efficiency upgrades
Together, these reinforce a long, visible runway of service revenues and improved pricing dynamics across the thermal generation value chain.
Risks to monitor
Despite the strength and persistence of these structural demand cycles, the landscape is not without its vulnerability. Several risks warrant close attention:
- Execution challenges around ramping production in defense and heavy equipment
- Talent and supply chain constraints in high precision manufacturing
- Dependence on complex, global supplier networks with limited redundancy
- Regional policy and regulatory uncertainty that may influence China exposed revenue streams
- Margin delivery risk when mix or software penetration falls short of expectations
We believe these risks do not negate the underlying opportunity, but they shape how we calibrate conviction and assess where structural scarcity translates into durable value.
Bottom line
Active management is, at its core, about placing capital where conviction is strongest, conviction built from our research efforts. The structural imbalances, spanning aerospace, defense, semiconductors, and power infrastructure, may provide a multiyear investment opportunity for our portfolios. Companies facing the dark cloud of negative AI narrative still may present selective opportunities, and we continue to study the implications, but we believe tilting toward companies anchored in long dated visibility, constrained supply, and durable pricing power offer compelling opportunities.