The dizzying array of new technologies is tied together with companies by two things: the desire to increase worker productivity and to breakdown complex information into small pieces in order to make informed business-planning decisions.
I think 2012 will be strong for corporate capital expenditure spending. Companies are poised to announce their fourth quarter (look cool in a note to clients: "4Q11") earnings and spending plans for the year and you always have to be thinking in front of the news. Is the global economy mixed at best? I suppose. There is considerable downside risk to any forecast attached to the word "eurozone." China has modest risk to its economic growth outlook as its government seems prepared to remove its foot from the brake with respect to fiscal policy.
But despite the abundant macro risks, I don't believe 2012 will be a period in which companies slash their capital expenditure budgets midyear due to the news of the day walloping stocks. Companies in the U.S., for instance, are inclined to boost worker productivity that is moderating. Instead of investing more juice into a person's paycheck, companies will likely opt to squeeze blood from a stone (see latest Caterpillar (CAT) worker dispute) and then take that blood and invest it in areas that jolt near-term productivity, which leads to improving profit margins and fatter year-end bonuses for executives. It's a vicious cycle.
- The rate of productivity growth slowed from 3% in the first quarter of 2011 to 2% by the third quarter. In 2010 productivity was a robust 3.9%. Companies are burning through their fixed assets (example being Sears (SHLD)) and human capital, which is odd considering the frequent assertion that companies are awash with cash. Perhaps management should be concerned with structure as opposed to boosting financial institution coffers by repurchasing shares.
- Quietly, multinationals are bringing manufacturing operations back to the U.S., requiring investments that for years were allocated to an international location.
Last year was one where a significant amount of order backlogs were addressed following the near depression here at home. In turn, companies utilized their capex dollars on automation technology, investments made especially attractive given state and federal incentives. With the backlog bulge largely satisfied, new fixed assets already in the ground and government incentives rolling offline, companies are likely to focus their efforts on software and hardware. Collaboration, customer interface and converting existing applications to mobile forms are a couple of areas that I am thinking about investment wise. For now, to minimize firm-specific risk, the Technology Sector SPDR ETF (XLK) is of interest as its top holdings are prime beneficiaries of capex allocations being meant for software and internet-related technologies that improve organizational productivity.