Computers, research and software will be the big-ticket items in 2016
Jan 2nd 2016
THERE have been three great waves of corporate investment in the past two
decades. First came the dotcom splurge of 1997-2001, when cash was poured into
building mobile-phone networks and the internet s backbone. Then there was the
emerging-market frenzy of 2003-10. Western firms threw about $2 trillion into
factories and other facilities in places like China and India. In 2005-13 there
was a craze for commodities, partly driven by insatiable Chinese demand. Global
energy and metals firms spent $6 trillion digging in the Australian outback and
drilling for oil in North Dakota and deep beneath Brazil s coastal waters.
The dotcom boom turned to bust, emerging markets are now in poor shape and
commodity prices have slumped in the past year (costing some firms bosses
their jobs see article). So where are companies looking to invest now? A new
study by Hugo Scott-Gall, of Goldman Sachs, a bank, crunches the numbers for
capital investment at more than 2,500 firms worldwide, forecasting how things
will look in 2017 compared with 2014. It finds a startling divergence across
industries (see chart).
Energy, mining and chemicals firms are expected to slash their
capital-investment budgets by 20-50%. Property firms are cutting back too, in
part reflecting the end of China s building boom. This has a knock-on effect on
those capital-goods firms that supply equipment to these industries. For
example, Caterpillar, which makes diggers used by mining and construction
firms, expects its capital investment in 2016 to be half the level of 2012.
In contrast, internet, software and other tech firms are on a high, with their
budgets expected to expand by a quarter or more. Though some tech firms have
gone asset-light, renting their processing power and data storage in the online
cloud , others including cloud-providers themselves are splurging on hardware.
In 2016 the combined capital spending of Google and Apple will be $24 billion,
almost equal to Exxon s $28 billion budget.
Measured in dollars, the overall picture is of a 15% fall in corporate capital
spending by 2017. Allowing for the greenback s big rise since 2014, the fall
will be just 5% or so in local-currency terms. And the figures exclude
research-and-development (R&D) spending. That is rising quickly. America s
national accounts, for example, show an economy-wide decline in investment in
physical plant being offset by a rise in R&D and software spending.
However you slice the numbers, growth in capital investment is unusually
concentrated. Of the industries that Goldman studied, 22 are forecast to have
shrinking budgets in dollar terms and 12 are expected to grow. The top 20
spenders on R&D firms such as Samsung, Roche, Novartis and Microsoft account
for 25% of worldwide R&D spending by listed firms, according to Bloomberg, an
information provider. The corporate world seems mostly destined to stagnation,
with only a few hotspots of investment and growth.
So investors might hope that an elite of investment-intensive, technology-based
firms will conquer new markets and increase profits faster than all others.
That is certainly what Silicon Valley s boosters think will happen. They cheer
each time tech firms unveil some new area of expansion smart watches,
driverless cars, virtual-reality goggles, delivery drones.
Yet history suggests that whenever there is a near-unanimous view on what to
invest in, disaster follows as firms in those industries lose their spending
discipline. The shares of Western firms exposed to energy and emerging markets
have lagged the S&P 500 index by over 50% in the past two years. In 2016 it
should become clearer whether the present funnelling of investment into
tech-based industries reflects a step change in the way the economy works, or
is just a symptom of a stagnant climate in which pockets of opportunity are
hyped beyond their true potential.