Is your portfolio still tilted towards growth?
Have you thought about increasing your weighting towards more cyclical companies? Global Income and Growth offers access to a very differentiated portfolio which is positioned to benefit from a rarely seen, long and multifaceted, capex cycle.
Taking the evolution of the bicycle over the last 150 years as an analogy, it is amazing to see what changes and what stays the same. Sometimes it can be a big leap, such as the introduction of pedals, sometimes it can be just aesthetics, like the Raleigh Chopper. The advent of the electric bike kicked off another significant change.
Are capex cycles similar?
During the 19th century capex was synonymous with the Industrial Revolution, driven by the introduction of steam powered engines. During the 20th century, we had capex cycles related to capacity increases and globalisation. There were also two elongated cycles: first, after WWII when every country had to reinvest in infrastructure; and second, in the seventies. It was partly driven by Carter’s Economic Stimulus Appropriations Act but also by a change in energy consumption after the oil crisis and a change in labour participation with more women joining the workforce1. Like today, inflation picked up markedly.
As we come out of a 30-year period of underinvesting, our research suggests that we are entering a new elongated capex cycle. Replacement is long overdue, but there is much more to this than just 3-4 years of renewing fixed assets. We expect that companies and governments will need to spend substantial amounts for the next 10+ years.
There are many reasons:
1. Physical investment in the developed market, which had already declined towards the end of the 1990s and early 2000s, decreased again over the last 15 years2. In some areas (roads, schools, power grids), it will take years and billions of dollars to modernise.
2. We see a multitude of changes that demand investment:
- Automation
- Onshoring/near shoring
- Digitalisation
- Energy Efficiency
- Security
- Climate targets
The next capex cycle will be complex. Navigating grant applications, readying infrastructure, introducing new products, and managing cost inflation will be hard. It will force companies who want to compete to invest ahead of peers. Larger players with a healthy cash balance will have the upper hand and will be able to bring the right products to the market, gain market share, have pricing power and in turn grow profits.
3. Many areas of investments will see support from regulation and political interests. Either in the form of subsidies (e.g. Chips Act in the US) or more restrictive regulation (reduction of CO2 emissions).
4. Various mega projects that have been announced but not implemented yet add up to trillions of dollars in spending and will last 2-10 years. In the region most advanced down this path, the U.S., it has been estimated that less than 20% of announced projects have started3. This gives us confidence about the magnitude and length of this upcoming megacycle.
Why does this matter?
1. Change on this kind of scale is rare.
2. The spread between winners and losers will be wide.
3. Most importantly, many income-oriented portfolios have been depleted of the industries at the heart of these spending patterns, due to concerns over their cyclicality. In some areas, valuations are very low.
Over the last three years we have been identifying the leaders which we believe can grow capital and income over the next ten years. On the back of this we have built a very differentiated portfolio that in our view is well placed to take advantage of this elongated and multifaceted capex cycle. This has already been recognised by the fund winning the Lipper Best Equity Global Income Fund over three years. However we believe there is more to come.
Interested in finding a new source of growth and income? Click here to find out more and to view our latest webinar.
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Capital at risk.
1US Consensus Bureau
2US Bureau of Economic Analysis
3Eaton Q4 Earnings Call Transcript