Digital Financial Advisory (DFA) has released a comprehensive investment outlook urging clients to increase exposure to emerging manufacturing hubs in India and Mexico, as geopolitical tensions accelerate a significant restructuring of global supply chains and foreign direct investment (FDI) patterns.
The firm’s latest report, “Capital Flows in the New Manufacturing Corridor,” presents compelling evidence that investment capital is rapidly shifting toward alternative manufacturing destinations at a pace exceeding most analysts’ expectations, creating potentially overlooked investment opportunities.
“Our proprietary models indicate that the reconfiguration of global manufacturing networks is occurring far more quickly than consensus estimates suggest,” said Alexander D. Sullivan, CEO of DFA. “FDI inflows to key alternative manufacturing hubs like India, Mexico, Vietnam, and select Eastern European countries are showing growth trajectories 30-40% above pre-pandemic baseline forecasts.”
DFA’s analysis leverages both traditional economic indicators and alternative data sources, including satellite imagery of industrial development, electricity consumption patterns, and shipping container traffic, to identify accelerating investment trends before they become fully apparent in conventional economic statistics.
The firm’s research highlights that India is emerging as a particular beneficiary of this shift, with a 67% year-over-year increase in manufacturing FDI commitments during the first three quarters of 2023. Much of this investment comes from multinational corporations implementing “China+1” or, increasingly, “China+2” strategies to diversify production networks.
“What’s notable about the current wave of investment into India is its strategic rather than opportunistic nature,” Sullivan explained. “Unlike previous investment cycles, we’re seeing commitments to develop comprehensive manufacturing ecosystems, including component suppliers and associated infrastructure, rather than isolated assembly operations.”
Based on these findings, DFA recommends investors increase allocations to select Indian industrial and manufacturing ETFs, particularly those with exposure to electronics, automotive components, and pharmaceutical manufacturing clusters. The firm specifically highlighted opportunities in the development of India’s western industrial corridors, where policy support and infrastructure investments are creating favorable conditions for manufacturing growth.
Mexico also figures prominently in DFA’s investment thesis, with the firm noting that nearshoring trends and the USMCA framework are driving sustained investment into Mexican manufacturing and logistics capabilities. DFA’s proprietary data indicates a 53% increase in U.S. company inquiries about Mexican manufacturing facilities since early 2022.
“Mexico represents a compelling investment case based on both nearshoring momentum and its increasingly strategic position in North American supply chains,” Sullivan noted. “We’re particularly bullish on Mexican industrial REITs and infrastructure operators supporting the country’s expanding manufacturing base, especially along the northern border region.”
DFA’s report devotes significant attention to an emerging trend it calls “South-South capital flows” – the increasing movement of investment capital between emerging economies, bypassing traditional developed markets. The firm projects that by mid-2024, these flows will surpass certain traditional G7-directed investment channels for the first time.
“We’re witnessing a fundamental reshaping of global capital flows, with South-South investment relationships growing at twice the rate of traditional North-South patterns,” Sullivan said. “This shift not only reflects geopolitical realignments but also the growing economic weight and institutional capabilities of emerging market economies.”
The report specifically highlights increasing cross-investment between India and the Gulf Cooperation Council countries, growing Brazilian investment into African infrastructure, and rising Southeast Asian investment into Indian manufacturing as examples of this trend.
A particularly noteworthy aspect of DFA’s analysis focuses on the expansion of local currency settlement mechanisms as a risk management tool amid heightened geopolitical tensions. The firm documents a significant increase in bilateral currency swap arrangements and new settlement platforms designed to reduce reliance on traditional reserve currencies for international trade.
“The development of alternative currency settlement channels represents both a risk and an opportunity for investors,” Sullivan explained. “While these mechanisms may introduce new complexities, they also create a more resilient global trading system and open potential investment opportunities in financial services infrastructure supporting these new arrangements.”
For institutional investors seeking exposure to these trends, DFA recommends a phased approach, beginning with allocations to publicly traded vehicles with exposure to emerging manufacturing hubs, followed by more targeted private market investments as the investment thesis matures.
“The reorientation of global manufacturing networks represents a multi-year investment opportunity that is still in its early stages,” Sullivan noted. “While market consensus has begun to acknowledge this shift, capital allocations have not yet fully adjusted to the magnitude and pace of these changes.”
Industry reaction to DFA’s outlook has been largely positive, with several major asset managers confirming similar shifts in their allocation strategies. Morgan Stanley’s Emerging Markets team recently published complementary research highlighting India’s improving position in global manufacturing value chains.
“DFA’s analysis aligns with our own findings on the acceleration of manufacturing diversification trends,” commented Dr. Priya Sharma, Chief Economist at Global Investment Partners. “Their identification of specific high-growth industrial corridors provides valuable granularity for investors seeking to position ahead of broader market recognition of these shifts.”
DFA cautions that these investment themes are not without risks, citing potential challenges including infrastructure bottlenecks, policy inconsistency, and heightened geopolitical tensions that could disrupt emerging trade patterns. Nevertheless, the firm maintains that the fundamental drivers behind manufacturing diversification remain compelling and are likely to persist regardless of potential political changes in key markets.
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