WITH the global recovery currently strong, corporate capital expenditure budgets are increasing.
Some readers may be aware that, on the heels of several years of under-investing in anything from new technology, to plants and equipment, to infrastructure or research initiatives, businesses are growing these commitments.
This year’s recent first quarter financial reporting season has pointed to the fact that companies have by and large refocused on greater capital expenditure allocations.
And here, we believe there could still be additional room for increases. Readers may be asking themselves which businesses or sectors would be most likely to benefit from this trend.
At a most basic level, beneficiaries would include firms that either manufacture or provide services to those sectors in expansion mode, such as capital goods, oilfield services, technology, infrastructure and software.
More generally, if readers tend to believe that the global economic recovery is likely to remain in place (albeit with some unevenness), then the broader industrial sector is an interesting one to look at. We particularly like those companies that focus on construction, civil aerospace, infrastructure and power generation.
We also believe that oilfield services will benefit from a pick-up in capital expenditure spending from among the large integrated oil names. With the price of oil at or above $100 per barrel, those projects that had been “previously shelved” now become economically viable.
These projects could include complex underwater drilling at greater depths or pipe-laying in more remote locations, which are capital-intensive to begin with.
We can also carry this thinking over into the materials sector. Due to the strong rise in certain commodity prices and sustained emerging market demand – coupled with the fact that not many global mining companies may have suitable acquisition targets on the horizon – those firms sitting on large cash stockpiles are now focusing on developing their own mining assets.
In the technology sector, demand also appears to be improving this year. Software and services are witnessing increased commitments, but readers may be surprised to find that hardware (such as memory storage devices, smart phones and tablets) is as well.
Telecom players are also increasing capital expenditures, looking to develop tower networks and increase investment in emerging markets, in part to compensate for revenue decreases in their local markets. Additionally, electric power transmission and distribution investment among utilities remains positive.
These investments may take a number of years to feed through into financials. Our strong conviction on the energy and technology sectors is partly driven by both sectors being early beneficiaries of this theme.
But in the longer-term, we do expect capital expenditure investments to feed through to top-line growth across a number of sectors and readers should note that this lends further credence to our positive view on developed market equities more specifically.
:: Andrew Miller is regional office head of Barclays Wealth in Newcastle
