Equities
(CapEx)pectations
5 min read 12 Jul 21
Summary: Stronger economic data and robust earnings growth are driving increased confidence in a more sustained recovery. With this backdrop, how are companies positioning themselves for the post-lockdown 'new normal'? Investment Specialist, Kirsty Clark reviews recent market performance and looks at capital spending intentions to meet growing demand and changing consumption patterns.
Despite a mid-month wobble, global equities remained relatively sanguine in June, with share prices benefiting from continued earnings strength and positive economic revisions. The MSCI AC World Index finished the month up 1.4% in US dollar terms.
Equity markets logged gains in both cyclical sectors and more defensive areas. The value rally lost some steam during the month, and growth stocks outperformed. Developed markets pulled ahead of emerging markets, and large caps outperformed their small cap counterparts.
Source: Refinitiv DataStream, 30 June 2021. Total Returns in USD.
US equities led the gains, supported by expectations of a fresh round of stimulus and further vaccine rollouts. UK, eurozone and Japanese equities were the laggards over the month. In the US, the NASDAQ indices were the strongest performers, up around 6%, with technology stocks benefiting from robust earnings expectations and waning inflation concerns – as the Fed adopted a more hawkish tone on future rate hikes. Financials were the sector laggards, weighed down in part by falling bond yields, while materials and utilities also underperformed the wider market.
Although the Fed maintained a dovish stance overall, it adopted a more hawkish tone around expectations for rate rises. Two rate hikes are now expected before the end of 2023, with the central bank acknowledging that inflation could end up being higher and more persistent than anticipated. US Treasuries sold off immediately following the announcement. However, over the month as a whole, they gained ground, with the 10-year bond yield falling from 1.59% to 1.47%.
Central banks in the UK and Europe remained dovish and reiterated their expectations of ‘transitory inflation’. In the UK and Germany, 10-year government bonds managed to nudge into positive territory in local currency terms, but finished the month down in US dollar terms – as the greenback strengthened. Global high yield bonds also delivered positive gains in June.
In commodities, Brent crude continued its upward climb, finishing above $75/barrel. It’s the first time in two years it has closed above $70/barrel. It remains up 45% year to date, as US production continues to lag pre-pandemic levels and the OPEC+ alliance only gradually brings production back to the market. Gold finished down as the US dollar strengthened against a basket of currencies on the back of the slightly more hawkish tone from the Fed. However, the greenback remains weaker year-to-date versus the UK pound.
Stronger economic and earnings growth are driving increased confidence in a more robust recovery in the second half of 2021 and into 2022. With the pandemic clouds beginning to shift, the global economy is now projected to grow by 6% in 2021 (the fastest pace since the 1970s)1 and 4.4% in 2022, according to IMF estimates. Meanwhile, governments have committed to ongoing expansive fiscal spending and central banks are holding firm on loose monetary policy for now.
While the global economy is likely to experience an uneven, multi-speed return to growth, this backdrop has set the scene for an uptick in both consumer spending and corporate investment across a broad range of sectors and geographies. There has been a reasonable amount of focus on the propensity for consumers to increase spending on the back of a rise in household savings, and due to pent-up demand during lockdowns, but there have been fewer observations about how corporates are positioning themselves for the global recovery.
In the latest monthly European Commission Business and Consumer survey2, economic sentiment hit a 21-year high in the European Union and the euro area in June, predominantly due to improving confidence in the services sector, but also in industry, retail trade, and construction. UK business confidence has also surged. A quarterly poll conducted by Deloitte, which surveyed finance directors at 100 of the UK’s leading companies, found that sentiment has been boosted by the UK’s mass vaccination rollouts, and that companies are increasingly looking to shift away from cost-cutting strategies to embrace more hiring and investment3.
Across the pond, a quarterly poll of chief executives in the US reported a sizeable jump in sentiment around the economic outlook – with accelerated vaccination rollouts and the promise of further fiscal stimulus boosting business confidence. Survey results showed that expectations around hiring, investment and sales had all increased in the first quarter of 20214.
Shareholders have also been encouraging companies to employ excess cash, reinvest in their businesses and increase capital expenditure (capex). In the latest Bank of America Securities Global Fund Manager Survey, 52% of investors surveyed confirmed their desire for corporates to increase capital spending – up from around 10% in 2020.
Source LHS Chart: Haver analytics, IMF, CEIC, Morgan Stanley Research *Global includes G4, BRIC, Korea, Indonesia, Taiwan and Mexico and is PPP-weighted. #Europe and euro area is Gross Fixed Capital Formation (GFCF) excluding intellectual property products and cultivated biological assets. Gross fixed capital formation (GFCF) comprises fixed asset acquisitions minus disposals by resident producers. Fixed assets are tangible or intangible assets from production processes that are used repeatedly and continuously in other production processes for at least one year. RHS Chart: Citi Research on over 730 non-financial publicly-traded US companies. Bubble size mirrors overall commitment.
Low interest rates and ample liquidity are keeping the cost of capital at historic lows, providing a further tailwind for investment. As confidence in the pace and sustainability of the recovery improves, many companies are beginning to invest again.
Pandemic-related disruptions to standard work patterns and consumption habits are spurring some companies to make long-delayed investments in their operations and infrastructure, or reorient existing capital, to better meet shifting demand preferences.
We’ve seen a rapid rise in online shopping, which has prompted some companies with a lesser presence to invest in their online footprint. For example, retailer Marks and Spencer (M&S) has recently announced the launch of 46 new websites in overseas markets – to increase its reach to over 100 countries. Technology and communication services companies are also looking to take advantage of the growth in online communications and streaming services, along with the use of tech equipment in the home.
Recent research published by academics at Stanford University and the University of Chicago, has noted a material rise in US patent applications for ‘working-from-home’ technologies – with figures more than doubling from January to September 20205.
There is an eagerness to embrace technology to meet growing demand but also to improve efficiencies or, indeed, to innovate and create new capabilities – for instance, the pandemic has emphasised the opportunity in medical innovation.
For others, the pandemic has highlighted the fragility of global supply chains and risk of disruptions, prompting a focus on supply chain resilience and, in some cases, a rethink about reshoring production or sourcing suppliers more locally.
Elsewhere, the ‘green revolution’ is seeing companies redirect capital to meet future expected demand for electric vehicles and renewable energy, for example. In the autos sector, US car and component companies have earmarked around $25billion for capital investment in 2021, almost 50% higher than in 20206.
The increasing focus on global sustainability is also prompting companies to re-examine their business practices and broader impact on society and the planet, and to invest in line with evolving expectations and regulations.
ESG bond issuance in the first half of 2021 has already surpassed full year 2020 levels, and accounts for around a quarter of European Investment Grade supply so far this year7.
Source: M&G Investments, Bloomberg, June 2021
There is ample evidence that many firms are on the move, either looking to take advantage of a boost in demand in the second half of 2021, or positioning for longer-term structural changes. However, not all businesses are increasing spending. Notably, companies in the oil & gas sector have cut or stalled investment versus pre-pandemic levels, although some have redirected investment into renewable technologies, while many airlines are still in ‘wait and see mode’ as we tentatively emerge from lockdowns.
With an uneven return to global growth, and divergences in opportunities and challenges across regions and industries, strong stock selection will continue to play an important role – particularly when looking to assess the prospects for companies reallocating capital and reinvesting for growth.
1 https://www.reuters.com/business/global-economy-stage-vigorous-recovery-jobs-growth-lag-2021-04-23/
2 https://ec.europa.eu/info/sites/default/files/full_bcs_2021_06_en.pdf
3 https://www.reuters.com/world/uk/confidence-among-uk-finance-chiefs-hits-record-high-deloitte-2021-04-12/ - survey was conducted between March 17 and March 30 and polled 100 CFOs from companies with a combined market value of £547 billion ($751 billion) among UK-listed firms.
5 Nicholas Bloom, Steven J Davis and Yulia Zhestkova – COVID-19 Shifted Patent Applications toward Technologies that Support Working from Home, 8 January 2021. https://bfi.uchicago.edu/wp-content/uploads/2020/09/BFI_WP_2020133.pdf
6 https://www.fdiintelligence.com/article/79663
7 M&G Investments and Bloomberg, June 2021. Issues below $100 million excluded.
The value of investments will fluctuate, which will cause prices to fall as well as rise and you may not get back the original amount you invested. Past performance is not a guide to future performance.