How to invest in the surge in CapEx

by: , Portfolio Strategist, New York Life Investment Management

CapEx is up

Capital Expenditures (CapEx) are up significantly in 2018. Meaning that companies are using free cash flows to upgrade productive capital. As we have described before, CapEx is one of the critical economic data pieces supporting our constructive view on the macroeconomic environment and financial markets.

U.S. CapEx

August 1988 – May 2018

Source: Thomson Reuters Datastream, Bureau of economic analysis BEA, NYLI, as of 9/5/2018.

CapEx is poised to continue to rise

Driven by the three factors displayed below, we expect the acceleration in CapEx to extend well into 2019.

  1. Opportunity: U.S. companies have a tremendous opportunity to invest. The Tax Cuts and Jobs Act incentivized them to invest, or increase CapEx by allowing full expensing of new assets over the next five years, significantly lowering the cost of capital.
  2. Capacity: Tax cuts, repatriation, rising profits, and easy credit are all very supportive of higher cash flows. Therefore, management will have to decide what to do with all their excess cash.
  3. Competitiveness: Stable prices in the U.S. – including low energy costs and relatively muted wage inflation – have increased competitiveness compared to doing business abroad. Corporate tax reform has also leveled the playing field for companies to keep or move operations to the U.S.

Nothing is a done deal

While we are optimistic about these developments, an acceleration in CapEx is only our forecast – and each factor supporting that forecast faces a risk. Opportunities could falter if trade protectionism and tariffs weigh on business sentiment; the firm’s capacity to invest could face headwinds as leverage is extended; and competitiveness could be challenged by a stronger dollar. But for now, these risks appear to be low.

Getting in on the action

There are a few ways to invest in CapEx trends:

  • Find an active manager or fund strategy that invests in companies investing or planning to invest their free cash flow in new capital and assets.
  • Focus on the appropriate sectors, company sizes, and regions. For instance, the CapEx renaissance is a U.S. experience, currently concentrated in the technology sector, where software is an important component of this trend.
  • If suitable, consider an overweight in small caps. Smaller companies have begun to rapidly ramp up their investment in capital.

U.S. business capital spending

Source: Thomson Reuters Datastream, Bureau of economic analysis BEA, NYLI, as of 9/5/2018.

Opinions expressed are current opinions as of the date appearing in this material only. The information and opinions contained herein are for general information use only. New York Life Investments does not guarantee their accuracy or completeness, nor does New York Life Investments assume any liability for any loss that may result from the reliance by any person upon any such information or opinions. Such information and opinions are subject to change without notice, and are not intended as an offer or solicitation with respect to the purchase or sales of any security or as personalized investment advice. There can be no guarantee that any projection, forecast, or opinion in these materials will be realized. Past performance is no guarantee of future results.

About Risk

All investments are subject to market risk, including possible loss of principal. There is no assurance that the investment objectives mentioned will be met. Diversification cannot assure a profit or protect against loss in a declining market. Past performance is no guarantee of future results.

Active investing is an investment strategy involving ongoing buying and selling actions by the investor. Active investors purchase investments and continuously monitor their activity to exploit profitable conditions. Active management typically charges higher fees. Investing in smaller companies involves special risks, including higher volatility and lower liquidity. There is no assurance that the investment objectives mentioned will be met.

Capital expenditures (CapEx) are funds used by a company to acquire or upgrade physical assets such as property, industrial buildings or equipment. It is often used to undertake new projects or investments by the firm.

Free cash flow is the amount of cash a company is able to generate after making required investments in the existing business, such as for new machinery and to pay for supplies.

New York Life Investments is a service mark and name under which New York Life Investment Management LLC does business. New York Life Investments, an indirect subsidiary of New York Life Insurance Company, New York, New York 10010, provides investment advisory products and services. NYLIFE Distributors LLC is located at 30 Hudson Street, Jersey City, NJ 07302. NYLIFE Distributors LLC is a Member FINRA/SIPC.

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Robert Serenbetz

Portfolio Strategist, New York Life Investment Management

Robert Serenbetz is the Portfolio Strategist with New York Life Investment Management’s Strategic Asset Allocation & Solutions (SAS) Group. He contributes to investment thought leadership and communication efforts across New York Life Investment Management

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