Bank of America Strategist Highlights ‘Old School Capex’ as a Hidden Gem in the Market
While investors grapple with a volatile market environment, Bank of America’s Savita Subramanian, head of U.S. equity and quantitative strategy, argues that "old school capex" stocks represent a hidden gem with significant upside potential. Subramanian believes that these stocks have yet to fully reflect the benefits of artificial intelligence (AI) and the nearshoring trend, making them a compelling investment opportunity. She highlights that while the market has seen substantial gains driven by big cap tech, the breadth of that growth is narrowing, and she believes the index might struggle to sustain its upward trajectory. Subramanian emphasizes that investors need to be selective, particularly in the short term, as the market for tech stocks is expected to remain volatile.
Key Takeaways:
- Big cap tech dominance is waning: While big cap tech stocks have driven significant market gains, Subramanian expects this to slow down in the near term.
- "Old school capex" stocks are undervalued: These stocks in the industrials, materials, and energy sectors have not yet priced in the potential benefits of AI and the nearshoring trend.
- Infrastructure spending is a key driver: Subramanian sees a strong infrastructure spending cycle on the horizon, driven by the need to support AI chip development and the increasing demand for domestic production.
Why "Old School Capex" Stocks are a Potential Winner
Subramanian’s argument hinges on the growing demand for infrastructure spending, driven by both the development and deployment of AI. Here’s why she believes "old school capex" stocks are poised for growth:
The AI Boom:
- AI’s infrastructure demands: AI requires extensive computing power, which in turn necessitates significant investments in infrastructure. This includes everything from data centers and energy grids to manufacturing facilities and specialized equipment.
- Increased demand for chip production: The production of AI chips will drive the need for advanced manufacturing facilities and specialized equipment, further boosting demand for "old school capex" companies.
- Nearshoring to support AI growth: The nearshoring trend, which involves companies shifting production back to the US, will further fuel the demand for domestic infrastructure and industrial capacity, creating opportunities for "old school capex" businesses.
A Growing Infrastructure Spending Cycle:
Subramanian emphasizes that the upcoming infrastructure spending cycle is not just a "nice to have" but a necessity. The increasing demand for AI and the associated infrastructure projects will fuel investment in "old school capex" industries, including:
- Construction and Engineering: Companies involved in developing data centers, power grids, and manufacturing facilities will experience a surge in demand.
- Materials and Components: The production of materials like steel, concrete, and electronics will see heightened activity as these companies cater to the infrastructure needs of AI.
- Energy sector: The demand for power generation and transmission will increase as AI-driven applications grow, benefiting companies involved in power generation, distribution, and renewable energy development.
Neglected Upside Potential:
Subramanian stresses that while the market is heavily focused on AI and big cap tech, the potential upside of "old school capex" companies has been largely overlooked. She believes that this neglect represents a unique opportunity for investors to capitalize on a growing sector with a solid future.
Investing in "Old School Capex"
Investing in "old school capex" stocks presents a compelling alternative to the volatility of tech stocks. While it’s important to conduct thorough research and due diligence, Subramanian’s insights highlight the potential of this often-overlooked sector.
Here are some key considerations for investors:
- Industry focus: Select companies within the industrials, materials, and energy sectors that directly benefit from infrastructure spending and the development of AI.
- Growth potential: Look for companies with a track record of growth and a strong pipeline of future projects.
- Financial strength: Ensure companies have solid financial fundamentals and a low debt level to weather potential economic fluctuations.
- Diversification: Spread investment across various companies within "old school capex" to mitigate risk.
Conclusion:
Savita Subramanian’s perspective on "old school capex" stocks offers a compelling argument for diversifying portfolios beyond the technology-driven market. By focusing on the growing need for infrastructure to support AI development, she highlights a sector with significant potential for future growth. While investors should carefully consider factors like industry focus, growth potential, and financial strength, "old school capex" presents a valuable opportunity to capture the upside of a burgeoning AI-driven economy.
