Book excerpt: Opportunities in the ‘Old Economy’

Peter Oppenheimer, the global head of equity strategy research at Goldman Sachs, has written his second book “Any Happy Returns: Structural Changes and Super Cycles in Markets,” which will be released on December 28, 2023, in the UK.

The below excerpt focuses on the Post-Modern Cycle, a period that started after the pandemic in which Oppenheimer expects inflation to be a bigger risk than deflation, and markets are likely to see greater regionalization, more expensive labor and commodities, and larger and more active governments.

Each era has its unique problems and, in many cases, opportunities. As we enter the Post-Modern Cycle, humanity faces a series of major challenges. Changing geopolitical alliances, the future of work, ageing populations and the environment are likely to be prominent issues for the foreseeable future.

From an investment perspective, the end goal looks exciting. A successful transition to a zero-carbon world would not only generate significant improvements in health but, clearly, would hold the prospect of marginal units of energy to be consumed at close to zero cost (both financially and in terms of the planet’s resources).

The International Energy Agency (IEA) estimates that global energy demand will be 8% lower in 2050 than today, despite the expectation that the global economy will be twice as large and the world’s population boosted by 2 billion. The combination of more efficient use of energy, improved resource efficiency and behavioural changes should help offset increases in energy demand. Equally, although the ascent of artificial intelligence (AI) may be daunting and highly disruptive, it offers the potential for higher productivity and significant advances in many industries.

One of the most dramatic developments of the post-financial-crisis period in equity markets was the outperformance of the technology sector. This largely reflected superior earnings growth and returns on equity at a time when many traditional industries were suffering from overcapacity and low returns. The boom in spending on the digital revolution has, to a large extent, been at the expense of investment in the physical world. As the chart below shows, the ratio of capex spending to corporate sales has declined dramatically since the financial crisis in most economies.

The commodity complex offered limited investment prospects because many commodity prices fell sharply as a consequence of relatively weak global demand and some oversupply. The backdrop of extremely low interest rates supported this trend as it helped to fund new businesses in the technology sector with ample liquidity and a low cost of capital. Companies that were unprofitable and consumed large start-up costs found it easy to raise capital. Their long duration (long period of expected payback until profitability) was not an obstacle because the low level of interest rates meant that the opportunity cost of the cash (or the return that the cash could otherwise generate) was very low.

For a decade or more, businesses in capital-light industries dramatically outperformed those in more traditional capital-heavy industries. The more recent underperformance of the capital-light group largely reflects the shift higher in the cost of capital since 2021.

However, the opportunity set for capex spending is changing. New priorities that include increased defense spending, finding alternative sources of energy supplies and decarbonization, for example, will not only be very expensive, but cannot be achieved purely through the development of smartphone apps or software; they will need significant amounts of capital spending on infrastructure.

This excerpt is from “Any Happy Returns: Structural Changes and Super Cycles in Markets,” which will be released on December 28, 2023, in the UK and is published by Wiley.

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