Global Inventory Replenishment: Riding the Rebound

As we enter the second half of 2024, the global inventory replenishment cycle is gaining momentum, presenting a range of opportunities and risks for North American investors. This report delves into the current trends in inventory replenishment across major economies and evaluates the potential impact on investments.

United States: Leading the Replenishment Cycle

The United States is at the forefront of the global inventory replenishment cycle. Since the beginning of 2024, nominal inventory growth rates have steadily increased. By April 2024, inventory growth rates rose from 0.3% to approximately 1.0%, with significant contributions from manufacturers, wholesalers, and retailers. Retailers, in particular, have led this growth, with their inventory growth rates climbing from 4.3% in January to 4.8% in April. This indicates a robust early-stage replenishment phase in the US market​​.

Both durable and non-durable goods have shown improvements in inventory growth rates. Durable goods have seen growth rates rise from 1.8% in January to 2.6% in April, while the decline in non-durable goods inventories has slowed from -9.4% in March to -8.4% in April. Specific sectors such as computer equipment, lumber, and petroleum products have demonstrated marked improvements, indicating a broad-based recovery across multiple product categories​​.

This replenishment cycle is further corroborated by the performance of S&P 500 companies, where inventory growth rates have rebounded from a low of -0.8% in Q4 2023 to -0.2% in Q1 2024. This recovery is driven by improved economic conditions and increased demand, providing a conducive environment for businesses to rebuild their inventories​​.

Europe: A Slower Pace of Replenishment

In contrast, Europe’s inventory replenishment cycle is expected to progress more slowly. The European Central Bank’s (ECB) anticipated interest rate cuts in June, coupled with a gradual recovery in the manufacturing sector since Q4 2023, set the stage for a potential inventory rebuild in the latter half of 2024. However, Europe’s overall economic recovery remains weaker compared to the US, and the impact of ECB's rate cuts will take time to manifest fully​​.

Retailers in Europe have already begun replenishing their inventories, while manufacturers are nearing the end of their inventory depletion phase. Various industries, such as pharmaceuticals, transportation equipment, and furniture, have extremely low inventory levels, suggesting that a replenishment phase is imminent. Nevertheless, the overall scale and speed of replenishment in Europe are likely to be subdued compared to the US​​.

Implications for North American Investors

For North American investors, it is crucial to monitor these developments closely. The early stages of inventory replenishment in the US suggest potential growth opportunities in sectors related to manufacturing, wholesale, retail as well as raw materials. Investors may want to consider increasing exposure to these sectors, especially in industries showing significant recovery.

However, there are several risks that could limit the extent of this recovery. The global economy is still in a fragile recovery phase, and trade barriers, particularly those between the US and China, have increased since May 2024. The imposition of tariffs on Chinese steel, aluminum, and electric vehicles by the US, and similar measures by the EU, could dampen export growth despite the underlying inventory replenishment trends​​.