#Articles — 13.09.2021


Theme 3

Vaccines, recovery and reflation


Capex boom, the real deal 

  • Capex will NOT falter: in the wake of the Great Financial Crisis, growth faltered and Capex disappointed. But since World War 2, we have not experienced such coordinated fiscal and monetary stimulus. Above-average global growth is expected next year. Global Capex could be 20% above pre-pandemic levels by end-2022, recovering twice as quickly as post-2009.
  • Corporations are confident when consumer demand is robust: we exited this crisis with record levels for savings, stock markets and house prices. Animal spirits are finally returning, and shareholders are encouraging Capex rather than share buybacks/dividends.
  • Underinvestment: a number of sectors were underinvested in the previous cycle. The surge in demand with reopening is leading to bottlenecks, illustrated by the low levels of inventories and stretched supply chains. The early movers will capture market share.

Don’t forget that the new economy needs the old economy

Not a replay of the post Great Financial Crisis cycle: the financial crisis was an endogenous financial shock which created a long period of deleveraging of corporate and consumer balance sheets, exacerbated by an inadequate policy response which was withdrawn too early. In contrast, the pandemic was an exogenous shock, with demand recovering much faster.

This time, the mother of all policy responses: the recovery has been very different this time, with coordinated, mammoth, and timely fiscal and monetary responses. Central bank balance sheets have expanded dramatically. The Federal Reserve and the ECB are pledging symmetric inflation targets, suggesting that rates will be raised later rather than earlier in this cycle.

Europe Recovery Plan and Biden Infrastructure Plan: the Capex recovery will be boosted by multi-year federal infrastructure programmes. The Eurozone EUR 750bn recovery plan has a heavy emphasis on green transition infrastructure, digital transformation and health.

The Biden programme of green initiatives includes 500,000 EV charging points and electrification of school and transit buses. There will also be large investments in traditional road, rail, bridges, and power infrastructure, as well as cyber and digital infrastructure, including broadband access in rural areas. We expect this bill to be passed in the coming months.

Global GDP will exceed pre-pandemic levels by mid-2021: the speed of the global recovery has given CEOs greater confidence in the longer-term outlook. This is critical for longer-term Capex investments. With above-trend growth forecasts for 2022, corporate Capex today should result in quicker paybacks in terms of profits. Portfolio managers are also encouraging companies to reinvest for growth, rather than returning profits in dividends and share buybacks.

Making up for years of underinvestment: from 2009 to 2015, Capex remained below trend. The world was focused on deleveraging, which led to an uneven recovery. Then, when Capex finally began to recover in 2018/19, the US/China trade war and the global pandemic dented confidence.

The Capex boom is far from over, current data (e.g. from purchasing managers’ surveys) continue to indicate low inventory levels across industry supply chains, while order backlogs are climbing on the back of strong end demand.

We also expect technology-related Capex spend to remain robust, driven by the demands of remote working and companies’ desires to digitise/automate processes in order to boost productivity.  According to a recent survey, ~60% of companies under coverage have increased their spending as a share of total investment, with two-thirds having plans for further increases over the next six months. 


Traditional & digital infrastructure

  • The cyclical trade is NOT over! Profits have tended to lead Capex historically as the latter gives companies the flexibility to reinvest in their businesses. In addition, bank lending standards continue to improve which, in turn, supports Capex growth. Focus on selected cyclical sectors after the rally. Take advantage of “growth scares” to reinforce positions.
  • Smart portfolio construction is KEY. Not about Cyclicals vs. Growth, but broader allocation between cyclicals, selected growth, and defensive sectors like healthcare and quality stocks.
  • In addition, it is not only traditional infrastructure that matters, but allocations between traditional and digital infrastructure too. Their success goes hand in hand. For example, a delivery of an end-to-end e-commerce product requires container shipping, transport infrastructure, aerospace, airports, ports, roads, software, and final mile delivery logistics. 

Poised to benefit from Capex: traditional infrastructure

Industrial equipment/automation: industrial equipment and automation solutions-oriented companies will benefit from onshoring and efforts to improve manufacturing productivity.

Traditional Infrastructure: a key pillar in the proposed Biden’s USD 2trn infrastructure plan is to revitalise ageing transport infrastructure, e.g. roads, bridges, rail, airports and ports. This will benefit construction equipment and construction materials-related companies.

Green infrastructure: a key component of the EU recovery plan is the approved budget spending tied to the energy transition. In the US, within infrastructure spending proposals, a significant proportion is allocated to supporting electric vehicle and green power generation development, as well as retrofitting buildings to be more energy efficient. Beneficiaries of both plans include the EV supply chain, and companies providing energy efficiency solutions for buildings, plus utilities pivoting aggressively towards green energy.

Aerospace: recovery in demand for air travel should improve utilisation rates and cash flow for airlines, improving flexibility for Capex. Fuel efficiency of new aircraft and carbon emissions will likely boost fleet replacement over time.

Poised to benefit from Capex: digital infrastructure

Semiconductor equipment companies: semi-equipment companies are the biggest beneficiaries of the current shortage of chips across different industry verticals and strong foundry Capex to address this shortage. These companies, together with Intel, will also benefit from the USD 50bn CHIPS Act.

Cloud-related Capex plays: cloud Capex continues to grow in 2021, driven by hyperscaler spending - Amazon’s Q1 2021 spend surged 78% year-on-year. With US cloud sales expected to grow at 30% annually on average over next few years, Capex related to cloud functions should rise accordingly. Beneficiaries include datacentre REITS and cloud semiconductor names.

5G-related Capex plays: the global roll-out of 5G is accelerating. For example, the US C-band auction is now completed, and communications service providers are significantly boosting 5G Capex spending. Beneficiaries include cellphone towers, network equipment companies and 5G infrastructure semis. Also, 5G is one of the seven flagships of Europe’s EU recovery and resilience facility. A significant share of the EUR 150bn budget is dedicated to 5G network infrastructure.

Software: investment in software, driven by the demands of remote working and companies’ desires to digitise/automate processes in order to boost productivity.