Capital expenditure spending recovers in the US
While 2012’s upside surprise came from the recovery of the US housing market, next year’s positive news flow could well come from US capital spending.
During 2012, consumer spending on durables remained in line with historical growth rates despite macro and fiscal uncertainty. However, capital spending weakened, lagging other components of economic growth. Businesses have been reluctant to launch new investment projects as uncertainty remains high in relation to the global growth environment and to 2013 tax obligations.
Indeed, at the beginning of 2012, prospects appeared good for continued solid expansion in global capital expenditure (capex). While the US capital stock resumed growing in 2011, the near-2% pace was well below that of the 2000s expansion, which itself was considered to be subpar (as companies absorbed the huge expansion from the tech boom of the1990s). Yet, growth of global capex essentially stalled in 1H12, at just 0.8% annualized in Q1 and 0.2% annualized in Q2. The fact that US capex growth has slowed sharply despite the relative stability of US GDP growth is consistent with an exogenous shock from the fiscal cliff anxiety.
Such policy uncertainty, which has been a significant drag on growth and also on business decisions, is likely to be resolved in the first half of 2013. Therefore, business spending should make a more important contribution to U.S. economic growth next year, assuming a deficit reduction deal is reached inWashington. Corporate balance sheets remain healthy and earnings have stayed resilient, thus giving companies the wherewithal to increase spending once the fog from fiscal uncertainty lifts.
A recovery in capex should favor sectors geared to thecorporate spending cycle and fits with our strategic overweight stance in Information Technology. As business confidence should improve and capex is expected to rebound, westrategically upgrade Industrials to Overweight from Neutral at the expense of Consumer Discretionary strategicallydowngraded from Neutral to Underweight.
The challenge with Consumer Discretionary stocks is that while earnings expectations and valuations are high, in the short-term the sector may continue to perform well amid the solid holiday shopping season (we keep a tactical Overweight on Consumer Discretionary).
- Overweight US Information Technology.
- Overweight Industrials.
- Prefer US High Yield and US Equity to US Investment Grade corporate bonds.