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MRB's Insight of the Week: stocks to play the coming cap-ex boom
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by Salvatore Ruscitti on Aug 23, 2013 at 00:01
After a disappointing 2012, courtesy of fiscal cliff fears in the US and the slowdown in global growth, US capital expenditure (capex) has come back to life this year.
MRB expects further solid gains ahead, which bodes well for a broader rebound in global fixed investment, given the leading tendency of the US. The global industrials sector, particularly the capital goods industry, will be a key beneficiary.
Our top pick in the capital goods industry is global electrical equipment companies, which offer leverage to the capex cycle at an attractive valuation.
Global electrical equipment stocks have mildly outperformed the overall market year-to-date. With relative valuations still at the low end of their range, the industry is well positioned for further relative upside as economic conditions improve.
Keeping the lights on
Electrical equipment companies sell a broad array of goods, including: generators, turbines, motors, automation equipment, heating ventilation and air conditioning units, and lighting fixtures.
Demand for these items is sensitive to global manufacturing and investment cycles. The acceleration in electrical equipment orders should be gradual, given lingering uncertainties about global growth.
However, with the order cycle depressed, there should be a fair amount of pent-up demand released as end markets, such as commercial construction and industrial automation, gradually revive.
In addition to cyclical tailwinds, the industry should benefit from secular opportunities such as the growing global need for power consumption efficiency, rising investment in renewable energy sources, and the build-out of energy infrastructure in emerging markets.