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Market Comment June 2021 - Happy Days for 2nd Half of 2021 - The unleashing of business

Strong Capital Expenditures Bode Well for Stocks

Photo by Max Fischer from Pexels

As the rich world gradually emerges from lockdowns, consumers go out and spend. Malls in the US are full of people spending stimulus checks. Movie theaters in Great Britain, which were allowed to reopen in mid-May, are full again. But behind the scenes, another, possibly more significant, spending spree is just beginning.

Companies and consumers alike have spent much of the past year nursing their resources. Recently announced corporate investment plans suggest that this phase is over. In the U.S. capital expenditure (Capex) is increasing by 15% annually, both in hard stuff such as machines and factories and intangible assets such as software. Companies in other parts of the world are also increasing their spending. The outlook for global corporate investment has never been so bright.

Investment in new products, technologies and business practices is, after all, the foundation for higher incomes and a better quality of life – and ultimately higher share prices.

Economic conditions are extremely supportive as money is amply available. In contrast to the time after the financial crisis, households have saved a lot. For US consumers with a pre-pandemic account balance of under USD 1K, that balance has increased seven-fold. For those with a balance of USD 2-5K, that balance is now up two-fold. A more determined fiscal and monetary response this time around has also allowed companies to top up cash. US investment grade bond issuance rose to a record USD 1.7 billion in 2020 from USD 1.1 billion in 2019.

Currently, the investment recovery is focused on a few industries. Global technology companies are projected to increase investment by 42% this year compared to 2019. Apple will invest USD 430 billion in the U.S. over five years, a 20% increase over previous plans. Taiwanese TSMC, the world's largest semiconductor manufacturer, recently announced investments of USD 100 billion in manufacturing over the next three years. Samsung's investments are due to grow 13% this year after rising 45% in 2020.

Demand is behind the increase in most spending in part because the pandemic has created new requirements: more online shopping, for example, means that more fulfillment centers and servers are needed. Remote work is also on the rise. For this to work smoothly, new equipment and software are required. The latest research shows that the proportion of patent applications for work-from-home technologies has risen sharply. Shipments of commercial computers are set to increase by nearly 10% this year, an acceleration even over last year.

Not all companies are increasing their investments. Global oil and gas companies drop one-tenth from pre-pandemic levels, possibly in response to lower expected demand for their planet-warming stuff. Airlines and cruise lines also reduced their spending, perhaps in the expectation that it will be some time before people can travel freely again. Many executives in raw materials or industrial goods companies continue to focus on capital discipline.

Companies that focus on discretionary consumer spending increased technology investments 36% year over year in the first quarter. Companies like Target and Walmart, two retailers, are trying to keep up with the online giants that are eating their lunch right now. Marks & Spencer, a crumbling brick-and-mortar retailer, recently announced that it has launched 46 new websites in overseas markets from Iceland to Uzbekistan.

Other retailers are frantically spending to expand their capacity as they were surprised by the surge in household spending which will likely prove transitory. From sofas to washing machines, everything seems in short supply. Earlier this year, Peloton announced significant additional investment to expedite the transportation of its exercise bikes out of Taiwan. Maersk, a shipping company, said it would buy more containers to help ease bottlenecks. Still, consumer demand for washing machines must have a limit somewhere and there are now more fun alternative ways of spending money, even more fun than buying a new washing machine.

The pandemic is leading to an era of greater technological optimism: from the swift adoption of entirely new business models when covid-19 hit, to the discovery of vaccines, may have reminded company boards of the payoff for innovation. For some companies, increased investments will lead to increased business while for others it may be a desperate race to survive against more innovative competitors while still others may be sitting on idle capacities once the temporary increase in demand has been satisfied.

All of this helps to explain why companies' expectations for investments in 2022 are even more ambitious than they are this year. The investment boom is only just starting. As discerning investors, we focus on the long-term trends that are likely to propel businesses higher.

Switzerland, May 31st, 2021


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