November 2021 / VIDEO
Capital Market Insights
Are we on the cusp of a global capex boom?
This video features Capital Markets Specialist, Ritu Vohora. In this episode, Ritu explores some combined factors that may create a perfect storm for a global capex boom.
Transcript
Hello and welcome to T. Rowe Price’s Capital Markets Insights, I’m Ritu Vohora.
As the global economy emerges from the pandemic, we’ve seen unprecedented monetary and fiscal stimulus and a surge in pent-up demand—leading to shortages and supply chain disruptions. At the same time, global corporations are cash-rich after years of underinvestment. Now they face the need to add capacity and unsnarl supply chains.
In this video, I explore whether these factors have combined to create a perfect storm for a global capex boom.
In recent years, global capital expenditure has slumped with global companies mostly have spent to preserve balance sheets, rather than expand capacity. Globally, capex hasn’t kept pace with depreciation since 2017. Unsurprisingly, the pandemic caused capex to fall even further.
The massive performance divergence between growth and value sectors has also meant capital has exited the old economy sectors and flowed into the ‘new’ economy. Industries such as coal and oil have also underinvested, due to ESG pressures from investors.
But we see many incentives now for a capex boom, including a need to invest in new technologies, capacity growth to meet surging demand and help offset inflationary pressures, and a horde of cash held by corporates, that could be used to finance investment.
According to S&P Global, the world’s largest corporations held a record of nearly USD $7 trillion in cash and short-term assets as of the second quarter of last year.
Individuals have also been saving instead of spending – with households in developed economies amassing $2.9 trillion in an extra savings, according to Bloomberg Economics.
Now, as confidence returns and demand is unleashed, there’s an urgent need for investment. Supply chain disruptions could boost re-shoring, fueling automation spending. Post-pandemic shifts of accelerated digitalization and technological innovation also demand capital investment. Meanwhile, consumer preferences and government policy are also pushing companies towards a greener and socially responsible future.
As a result, capex is expected to surge by almost 12%1 in 2021, following years of underinvestment. Growth is expected in all regions and across broad sectors, especially semiconductors, software, retail, and transportation.
To meet green targets the world needs to spend
Over the next few decades, trillions of dollars in capex will be needed to meet the world’s ambitions of reaching carbon neutrality. This monumental challenge will require investment in both traditional industries and new supply chains. Goldman Sachs estimates that China, for example, will need to spend USD $16 trillion to reach zero net carbon emissions by 2060.
Furthermore, the EU’s recovery package is tilted towards green spending—from electrification of the grid to super-fast broadband. President Biden’s infrastructure package also focused on innovation and green initiatives. Record amounts are already are being invested in solar, wind, and other renewable energy sources.
Increased capex should help drive growth and employment but could also feed further inflationary pressures. While most economists still expect the current acceleration to be transitory, this view looks increasingly risky as price pressures build throughout the global economy.
Investment Implications
Like shovels in a gold rush, companies that provide the tools to build the digital and green infrastructure of the future could be some of the biggest beneficiaries of higher capex. Distribution, logistics and data centers require companies to invest in physical infrastructure to support the increasingly digital global economy. The world will need to spend heavily on traditional sectors during the transition years.
We think potential winners could include manufacturers of capital equipment – from automation, robotics, and software – to electrification of grids and energy storage. Emerging market economies also potentially stand to benefit - as suppliers to the global economy.
Only time will tell whether we are on the cusp of another capex boom, but the current confluence of factors, provide encouraging tailwinds.
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November 2021 / INVESTMENT INSIGHTS
Ritu Vohora is an investment specialist representing the firm’s views on capital markets in the Multi-Asset Division.