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#Market Strategy — 31.01.2018

Business Investment On The Rise: Cyclical And Secular Drivers

Guillaume DUCHESNE

2018 Investment Themes series: Megatrends theme #5
 

Companies will continue to invest in 2018, thanks to the buoyant economic cycle but also because of the necessity to invest in innovative technologies to ensure their long-term productivity. This theme identifies stocks which will benefit from this trend.

Main drivers supporting the recovery in investment

2018 will offer opportunities in the “business investment on the rise” theme. We see two drivers supporting investment.

An economic climate conducive to investment

The global economy is benefiting from a more favourable environment. Economic growth has taken off in a large number of countries, business and consumer confidence remains upbeat, demand for goods and services is increasing and company earnings are improving.  Against this backdrop, companies are investing to secure productivity gains. The favourable economic cycle is spurring them to replace their production tools. Sometimes companies must respond to problems stemming from obsolete equipment and a lack of major investments in recent years.

Following the sharp contraction during the 2009 crisis, business investment rebounded, but did not benefit from a vigorous momentum between 2010 and 2015. In this context, business investment picked up very slowly. A large number of companies were reluctant to invest, owing to overcapacity and lacklustre end demand. As a result, they were long overcautious about their intention to spend (see graph on the US). An acceleration in investment started in 2016 thanks to a more favourable economic climate.

Long-term business investment

Apart from the economic climate, another challenge for companies is to develop new (often costly) investment projects, especially in the area of innovation. Indeed, certain innovations will be key in the coming decades.  Analytics (big data), automation, artificial intelligence, digitisation, 3D printing, etc. are already transforming—and will continue to transform—the manufacturing process of companies. These innovations are guaranteeing—and will continue to guarantee— greater efficiency (productivity gains), and in parallel, will help to adapt products to client expectations (personalised products). According to several research consultancies, the robotics and artificial intelligence market could reach $153 billion by 2020. The boom in these new technologies also creates security problems, often difficult to manage.

These business investments go beyond the simple consideration of economic cycles and are part of a long-term trend.

Further potential in equity markets

We think that equity markets will continue to trend upwards in 2018, buoyed by an improvement in company earnings. Today the global economy is more advanced in its cycle and investment-related sectors will benefit. The aim of this theme is to invest, especially in the technology and capital goods sectors.

In conclusion, we think that investment will be a key theme in 2018, thanks to a favourable economic climate and the need for companies to invest in new technologies.

MAIN RISKS

- A decline in the economy in the wake of a recession in a major economic region (e.g. the US).

- A sharp deterioration in market sentiment, with investors moving away from equities in favour of less risky assets. A strong correlation to the equity markets would have a negative impact on this fairly risky theme.

- A more aggressive monetary policy in the US and a more rapid-than-expected increase in interest rates could jeopardise this theme.

- Doubts on growth prospects in new technology stocks.

 


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Stay tuned for more articles on each of our 2018 Investment Themes.