The cycle that emerged after the pandemic is shaped by a different set of macroeconomic conditions and priorities. This cycle is likely to be more inflationary, with higher interest rates over the long term (even if these are gradually returning to more reasonable levels), a region with a more favorable economic climate and a more favorable investment climate. more reasonable levels), increased regionalization, higher labor and raw material costs, and larger, more active governments. This new cycle is also having an impact on capital spending, and that's the subject of this article.
A closer look at Capex
Capex, or capital expenditure, refers to fixed assets, i.e. strategic expenditures that have a positive long-term value by reinforcing the company's future growth. These assets can include equipment, buildings, vehicles or technological investments.
Impact of this new cycle on capital expenditure
Historically, companies with low levels of capital expenditure (i.e. low Capex relative to revenues) have performed better. This is true of the technology, medical equipment, pharmaceuticals, consumer goods, beverages, food, tobacco and IT services sectors. Conversely, capital-intensive sectors include automotive, mining and metallurgy, telecoms, oil and gas production, and utilities. Light" industries have outperformed since the 90s, and this gap has widened since the 2008 financial crisis.
Source : Goldman Sachs
Business operating expenses have risen in many cases, but this has not exerted downward pressure on margins overall, as this has been offset by lower costs in other areas.
Of course, spending on technology solutions is likely to remain very high, and the incentive could be even stronger in areas related to energy efficiency, labor substitution and artificial intelligence. For example, the Magnificent 7 spent $160 billion in 2023 to consolidate their competitive position and invest in artificial intelligence. Capital expenditure has already risen sharply, but this increase is set to continue for some years yet. The biggest investments are in data centers, semiconductors, airlines, the oil and gas industry and technology. In addition, the changes in the energy mix that will be required to achieve decarbonization ambitions by 2050 will be capital-intensive. Capital expenditure on primary energy has fallen by 35% over the past decade, and could rise to $1.4 billion in 2025 (from $0.9 billion in 2021), according to analysts at Goldman Sachs.
Increased capital expenditure (Capex) is therefore one of the main features of this new cycle. Since the early 2000s, capital expenditure as a proportion of sales has been declining due to low nominal GDP growth. However, demands for simplification of supply chains for reasons of safety and environmental sustainability, as well as increased spending on defense and decarbonization, should push capital expenditure upwards.
Let's summarize the factors increasing Capex
- The pandemic and the war in Ukraine have revealed the fragility of global supply chains. Many companies are now considering relocating production to improve supply chain resilience. This will lead to an increase in capital expenditure to build local infrastructure.
- Commitments to decarbonization and the quest for energy security, particularly in Europe, will require massive investment in renewable energies and energy storage technologies. Our analysts estimate that capital expenditure in the energy sector is set to grow by 60% between now and 2025.
- Labor scarcity and high costs will drive companies to invest in technologies that improve efficiency and reduce dependence on labor. This includes artificial intelligence, robotics and machine learning.
- Rising geopolitical tensions and the war in Ukraine have led many governments to increase their defense spending. Germany, for example, has announced a special €100 billion fund to modernize its armed forces.
Impact for investors
Investors should focus on companies that can innovate, disrupt, enable and adapt, regardless of region or sector. Companies that can maintain stable margins and dividend growth, and those that can improve productivity by finding solutions to the scarcity and high cost of energy and labor, will be particularly attractive.
Among sector opportunities, there is today a positive consensus on :
- Companies involved in energy efficiency solutions, carbon storage, modular nuclear power plants and battery storage. Examples: Schneider Electric, Eaton, ABB, CATL, LG Energy Solution, Vertiv.
- Companies specializing in robotics, artificial intelligence and machine learning. Examples: Microsoft, Alphabet, Nvidia, Tencent, Keyence, Fanuc.
- Companies benefiting from increased defense spending and infrastructure investment. Examples: RTX Corporation, Saab, Kongsberg Gruppen, Rheinmetall, BAE Systems, Caterpillar, Atlas Copco.
The new cycle that began 4 years ago represents a significant change from the previous one. Investors have to adapt to an environment where inflation is higher, interest rates are rising, and capital spending is on the rise. Companies must invest to achieve environmental goals, improve productivity in a tightening labor market, and relocate part of their production in a more sustainable way after decades of globalization. By focusing on companies capable of adapting and innovating, investors can successfully navigate this new economic cycle.
