Thoughts from our Domestic Equity Team
As part of the current economic recovery, we expected to see a trend toward increased corporate capital expenditures (capex). However, a more nuanced picture has recently emerged indicating that many companies are continuing to hold onto their cash as well as their equipment and assets.
In fact, Corporate America is relying on capital equipment and infrastructure that is on average older than at any point over the last 30 years, according to J.P. Morgan. While we believe this trend is unsustainable in the long-term, we do not think a general recovery in capital expenditure is imminent. In fact, we anticipate that companies may opt to let their existing assets age as they wait to have a clearer read on consumer demand. Furthermore, technological advances may be helping companies get more life out of their existing assets.
Based on our current read of the capex environment, we have selected a more targeted investment approach. In particular, we are looking at companies that:
- enable the production capacity of other companies to remain high without large capital expenditures. For example, makers of 3D printing equipment can create temporary replacement parts for companies with broken equipment.
- sell to firms that may have no choice but to make capital expenditures due to aging equipment and technology.
You can find these recent investments in our new “Rebuild and Retool” theme.
Submitted by: Lee Caleshu, CFA
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