As the world learns to live with Covid and fewer restrictions are needed, more companies should be encouraged to invest in expectation of stronger future growth. After several years of increasing earnings, many have strong balance sheets, despite the shock to the system provided by Covid-19. Companies should therefore be willing and able to increase their spending. Indeed, most economists expect capital expenditure (the money used by companies to buy, upgrade or repair assets such as machinery and buildings) to grow at its fastest pace for years in 2022, helping to fuel economic growth.
Some of this increased investment is likely to come in response to rising demand and the need to respond to supply chain bottlenecks. In the UK, business investment may also be lifted by government tax incentives and the need to upgrade assets previously neglected because of Brexit uncertainty and the pandemic.
Source: Bloomberg. As of 31st December 2021.
Consumers are also in a very strong position. In the UK, households built up their savings to a record £200 billion during the pandemic, largely due to lockdowns limiting their ability to spend. The savings accumulated in the US are even greater. These savings paved the way for a boom in spending on goods in 2021.
Even after this, consumers who were able to put money aside during the lockdowns still have extra savings and this war chest should help fuel continued spending throughout 2022. Consumer spending is a big driver of developed market economies and if households are able to spend at a rapid pace without accumulating more debt, this should help to power ongoing economic growth.
(Rebased to 100 at start of recession).
Source: Bloomberg. As of 30th September 2021
We believe strong business capital expenditure along with a rise in consumer spending will lead to good growth for the global economy in 2022, despite the withdrawal of government support. This is a positive environment for investors.
For businesses to increase investment, they must be confident that the economic cycle will continue and the impact of Covid will diminish. One of the biggest benefits of capital investment for equity investors is that it provides non-inflationary growth. In contrast, an increase in consumer spending fuelled by lockdown savings will probably push up inflation further.
We’re seeing an uptick in capital investment across a range of industries. Many companies with products tied to the housing market, for example, have underinvested for the past decade and are now trying to catch up. Within certain segments of the food and protein industry, labour remains in extremely short supply, and automation is viewed as an important part of the longer-term solution.
We see this particularly within the automotive industry. The automotive original equipment manufacturers are running at full speed, and the suppliers of key components such as semiconductors and connectors will need to step up their capital investment in order to meet growing demand. Of course, this is just not a story for the auto industry.
Entegris is an example of a company we have invested in within the Omnis US Smaller Companies fund where we’re expecting to see a meaningful increase in capital expenditure over coming years. It is a provider of specialty chemicals and filtration systems used in manufacturing processes across several high-tech industries, particularly semiconductors and life sciences.
The company has a leading position tied to high-growth markets and plans to increase capital investment to take advantage of strong demand. Capital expenditure (as a proportion of sales), which averaged 7% between 2016 and 2020, rose to 10% in 2021, and the company forecast that it will be 15% over the next three years.
