In “Capex complex: Seeking a revival in global capex”, Goldman Sachs is reversing its bearish stance and getting bullish on global capex prospects.
Global capex has hit a trough. After three years of declines, aggregate capex for Goldman Sachs’ coverage of c.2,500 companies is set to grow by c.4% yoy in 2017 according to our analyst estimates, in line with c.4% real growth in global GDP and an 8% rise in aggregate sales. However, to call this the beginning of a recovery in ‘growth capex’ seems premature.
We’ll return to the issue of growth versus maintenance capex below but, at the aggregate level, each of the four constraints Goldman previously identified – low nominal GDP growth, overcapacity, uncertainty and technology – is easing.
Firstly, our economists expect global GDP to grow at 6.2% yoy this year on a nominal basis, the fastest rate since 2011…Secondly, while global overcapacity persists, it is beginning to dissipate thanks mostly to concerted restructuring efforts in China over the last 12-18 months, in terms of shutting down inefficient and emission-intensive supply in sectors such as steel, coal, chemicals and cement. The third factor is low confidence, stemming from geopolitical and policy uncertainty, i.e. potential turnover in governments, populism, taxation policy, minimum wages and mixed signalling over regulation…Finally, there is technology. Digitisation – including physical devices being replaced by software…However, the ubiquity of technology and the disruptive competition it enables is increasingly pushing incumbents to invest in new types of assets in order to upgrade and catch up to new competition.
On a sectoral basis, Goldman sees divergent trends for 2016-19E.
13 global sectors are expected to grow capex over the next three years, while five are set to shrink total spending. This divergence is evident across regions…(for example) US shale producers are expected to continue spending on supply growth (+5%), while Big Oil in Europe pares back (-5%). After years of building out capacity, Chinese utilities are focused on improving utilisation rates and rationalising spending (-7%)…and within sectors; speciality retailers in the West are upgrading to better compete in an omnichannel world (+8%), even as food retailers remain under pressure from discounters and Amazon (0%). Traditional carrier capex is only expected to grow 1% yoy in 2017 and in 2018 as the recent capex cycle comes to an end, but within that, cable and cloud-related capex should continue growing rapidly”
Which it summarises in a heat map…
Here’s the difficult bit…
Picking winners and losers from the analysis is more complex these days, as Goldman laments.
In the absence of mammoth capital investment upcycles such as the commodity boom, EM infrastructure build-out or a telecom upgrade cycle, identifying capex winners in today’s economic backdrop is a much more nuanced exercise and requires us to delve into sector-specific and company-specific drivers.
Paraphrasing Goldman’s findings, one problem is that capex is not what it was. For example, it can’t be assumed that investment in excess of depreciation is simplistically equated with “growth capex”. Goldman explains…
In many sectors, this increase in capex, over and above depreciation, is not expansionary, but defensive in nature; companies are spending more on capex to fight against disruptive competition and counter regulatory costs.
In the “Spending to defend” category, for example, Goldman lists the following sectors:
- Auto OEMS;
- Utilities; and
On the other side of the “ledger”, Goldman identifies four “buckets of winners” which are.
- Returns accretive capex;
- Prudent spenders;
- Value chain beneficiaries; and
- R&D winners.
Companies undertaking “Returns-accretive capex” to drive revenue growth are “relatively scarce”, although, unsurprisingly, Tech features prominently. However, the next statistic in Goldman’s report about concentration in tech spending raised our eyebrows.
The spike in software and semis capex can be attributed to large tech companies investing to tap new, and often capex-intensive, end markets. With c.US$18 bn between them, four firms – Alphabet, Facebook, Alibaba and Microsoft – will account for c.70% of the growth in capex for our global coverage of 190 software companies between 2016 and 2019E, as they venture into more asset-heavy businesses such as autos, retail and cloud.
Goldman lists 33 global companies where its analysts expect capex to increase by at least 5% in 2017-19 versus 2015-17 and increase CROCI by 2%.
In the “Prudent spenders” category, Goldman identifies.
- Big Oil companies;
- European telecoms;
- Chinese utilities; and
- Subsectors such as Casinos, Tyres, Brazilian beer and Materials
Goldman’s “Value chain beneficiaries” are capex enablers which benefit from the spending of others (e.g. their customers), no matter what the motivation for that spending is. In this category, Goldman lists eleven companies.
Finally, there are the “R&D winners”, who are spending on innovation. We were interested to learn that the five biggest R&D spenders globally in 2015 were VW, Samsung, Intel, Alphabet and Microsoft. This category is also plagued by “growth versus defensive” issues and the “quality” of spend. Goldman publishes a list of companies where its analysts are positive based on “R&D strategy and productivity”. High-profile names on the list include Facebook, ASML, Applied Materials and Mazda.
So, a faster rate of global capex growth is the good news. The bad news is that some traditional sectors are investing to survive and will dilute their return on invested capital in the coming years.
One of Goldman’s charts sparked another thought.
This economic cycle is long in the tooth and corporate capex in the chart above betrays more than a little propensity to be pro-cyclical.