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December 2021 / GLOBAL MARKET OUTLOOK

Path to Global Sustainability

Investment in global supply chain, public infrastructure and renewable energy development could benefit capital goods and related industries

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Vulnerable supply chains, crumbling infrastructure, higher energy prices, and a longer‑term need to reduce carbon emissions all have helped push economic sustainability to the forefront of the global policy agenda, T. Rowe Price investment leaders say. This could boost public and private fixed investment in 2022, supporting economic growth.

“It may be that we’re in for a paradigm shift here,” Thomson says. “You can certainly make the case for a sustained period of high capex [capital expenditures].”

Global corporations appear to have ample resources to finance fixed investment, thanks to strong earnings, spending restraint amid the pandemic, and a surge in low‑cost borrowing. The cash holdings of the companies in the S&P 500, for example, totaled nearly USD 2 trillion at the end of September 2021.

Corporate spending on fixed investment has been relatively restrained for the past several decades, Thomson notes, in part because new technologies enabled companies to boost productivity and profitability without heavy capital outlays.

But that may be changing. Economic recovery spurred a sharp cyclical acceleration in capex in 2021. The push for sustainability, Thomson suggests, could generate a more extended wave of investment in physical infrastructure—ports, highways, power grids, etc.—and in capital goods manufacturing.

U.S. Corporations Are Flush With Cash, Leaving Them Well Postioned to Finance Capital Spending

(Fig. 1) Cash holdings of S&P 500 Index companies and 12‑month percentage change in U.S. capital expenditures

U.S. Corporations Are Flush With Cash, Leaving Them Well Postioned to Finance Capital Spending

Cash holdings as of November 30, 2021. U.S. fixed investment as of September 2021. Goldman Sachs Capex Tracker as of October 2021.

1 The Goldman Sachs Capex Tracker is a monthly index based on 15 U.S. investment‑related indicators such as loan demand and capital goods orders.

Sources: Strategas Research Partners, Goldman Sachs Global Investment Research (see Additional Disclosures), and U.S. Bureau of Economic Analysis.

Thomson identifies several trends he thinks have the potential to drive capex, including:

  • Meeting the international target of “net zero” carbon emissions by 2050 will require heavy investments in utilities, the automotive sector, and green technologies.
  • Ports and maritime fleets need to be expanded to bolster global supply chains; onshoring those supply chains could boost demand for warehouses, rail and truck delivery, and domestic factories.
  • Upward pressure on wages could produce a substitution effect as companies try to replace labor with capital, spurring investment in factory robots and other automation equipment.
  • Companies may decide to rebuild depleted inventories, which in turn could spur investment in new productive capacity.
  • Fiscal policymakers appear more relaxed about spending, debt, and inflation. This could clear the way for public infrastructure spending—like the USD 1 trillion package passed by the U.S. Congress in late 2021.

For investors, these trends could generate potential opportunities in both equity and credit markets in 2022.

A capex boom could be expected to boost sales and earnings for capital goods manufacturers, Thomson notes, to the potential advantage of stock markets in Germany and Japan, which host some of the world’s leading industrial companies.

European banks, which have carved out a major role in financing investments in solar, wind, and other renewable energy sources, also could be indirect beneficiaries, Thomson adds.

Financing “transformational” industries has long been a core competency for high yield debt markets, Vaselkiv argues—as evidenced by the role that high yield financing played in getting the electric vehicle industry off the ground.

This could be an exciting decade as we move from traditional carbon fuels to cleaner sources of energy.

- Mark Vaselkiv, Chief Investment Officer, Fixed Income

“This could be an exciting decade as we move from traditional carbon fuels to cleaner sources of energy,” Vaselkiv says. However, demand during that period also could be high for “transitional” fuels, particularly natural gas, he suggests. This likely would require substantial investment in gas production and distribution. “I think global high yield markets are well positioned to provide that capital.”

The runup in energy prices seen in 2021 also could help reduce carbon emissions, by restraining demand for oil and making renewable sources more competitive, Page notes.

To a considerable extent, Vaselkiv adds, higher energy prices are the product of a steady decline in oil and gas investment—partly driven by pressure from activist shareholders but also reflecting the industry’s poor profitability.

“Some of these companies haven’t generated free cash flow for years,” Vaselkiv says. “You look at some of the major oil players, and their stocks are significantly below where they were five years ago—in the middle of one of the great bull markets in history.”

Path to Global Sustainability

For illustrative purposes only. This is not intended to be investment advice or a recommendation to take any particular investment action.

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