Hidden Capex

The world is entering a completely new capex cycle. Investment in innovatory technology is not being adequately captured by the data. Furthermore, the new innovative sectors simply don’t require the level of spending that ‘old capex’ did. But there is another side of the coin. With less real investment needed, savings are exceeding investment, ex ante. Artificially-low yields on financial assets force people to raise levels of savings for old age. And the pricing power of labour is being permanently weakened by innovatory, labour-shedding technology. The result is a deficiency of aggregate demand. Up to now, these excess savings have been diverted into investment in financial assets. Bond and equity markets have boomed. However, in the short term, bond yields are set to rise — part of our repricing of capital theme. That threatens a correction in all financial asset valuations. But longer-term, in the high-productivity innovative economies, we will see subdued inflation and thus lower ‘normal’ bond yields. And equities will benefit from high real returns from innovation, specifically in telecoms, IT and the healthcare sector. R&D spenders will outperform, specifically the US continues. We are short emerging market assets reflecting our view that they are long-term losers from this shift.

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