Global capex as % of GDP remains elevated, sustained sector outperformance unlikely via JPMorgan – data from Bridgewater
The J.P. Morgan Capital Goods team has been cautious on the outlook for global industrial capex (and hence the sector) since 2012. While capex as % of GDP is at a very low level in some markets in Western Europe, we continue to see overall industrial capex as elevated globally, particularly in Emerging Markets, while in the US, capex has recovered to be in-line with historical trends and with the economy in the seventh year of a recovery, there should be more limited growth from here. This view is supported by top-down data, as shown in Figure 12 below. Global capex as % of GDP stands at 16%, slightly down from the 2013 peak, but still at the upper end of its range of 12-16.5% seen since 1973. This is due to a 10-year capex cycle in Emerging Markets, particularly China.
The main driver of European Capital Goods sector sales growth is the near-term direction of the economic cycle and changes in GDP growth. However, there is also an underlying longer-term trend that goes beyond the economic cycle. Over the 1990-2014 period, the European Capital Goods sector grew 3% organically (nominal) vs 2.9% global GDP growth (real). In 1995-2003, which was characterized by various Emerging Markets in crisis (Russia, Thailand, Argentina, Mexico etc) and low commodity and oil prices, the sector materially underperformed global GDP. During the “supercycle” from 2003-2012, even including the Great Recession, the sector grew close to 6% organically per year, roughly 2x global GDP. Since 2012, the sector has grown organically by only about 1% per year, despite global GDP growth that has been close to the long-term average of 3%.