Chris Rice has moved his Cazenove European fund to an overweight in media, technology and business services ahead of an expected surge in capital expenditure that will benefit the sectors.
He has taken the fund from a neutral weighing in the sectors to an 11% overweight since the start of the year. The manager predicts companies will resume spending on IT and advertising, which he calls soft capital expenditure, as opposed to buying plant, equipment and commodities, as in the last cycle between 2001 and 2009.
Rice says each cycle’s expenditure pattern typically concentrates on different areas than the last one.
He is focusing on companies that will benefit from spending on advertising, promotion and IT rather than expenditure on increasingly expensive commodities, and industrial goods such as steel and iron ore.
The fund’s exposure to media stocks has risen from 6.3% at the start of this year to 6.5% now. Technology hardware and equipment exposure is up from 1.5% to 1.8%. Business services exposure is also up from 0.9% to 2.5%.
Rice says for the first time since 1945, US and European companies are not re-investing enough to keep up with the rate at which their equipment is depreciating.
“Unless investment picks up, the capital stock of the nation will fall and growth will turn negative. We would anticipate there has to be a large release in capex as a proportion of GDP,” he says.
Rice cut exposures to industrial and commodity cyclicals to free up cash for the rotation.
Rice’s technology holdings include SAP and Dassault Systeme. Its media exposure is via Mediaset and Publicis.
European companies’ spending on advertising is now 12% below its long-term trend and at its lowest level since the early 1990’s, Rice says.
“During the recent crisis corporates overall have halved their advertising budgets, and budgets at small and medium-sized businesses went to zero,” he says.
“I am most interested in areas where the relative prices of the capital goods or services have dropped.”
