Bond investors & an industrial revolution

The views expressed are those of the author at the time of writing. Other teams may hold different views and make different investment decisions. The value of your investment may become worth more or less than at the time of original investment. While any third-party data used is considered reliable, its accuracy is not guaranteed.

One of the key questions that markets are currently trying to answer is whether central banks will be able to engineer a soft landing for the global economy. While an important consideration, I think investors should not overlook the broader structural shifts that are reshaping the investment landscape in this new economic era. Take for instance the dramatic pickup in all types of corporate capital spending we are witnessing in the US. If sustained, this trend could, in my view, trigger a new industrial revolution in the US and beyond, with major implications for fixed income investing.

A potentially structural story

I think today’s significant increases in capital spending are not a temporary phenomenon but, instead, are being driven by long-term factors such as:

Rapid developments in AI, which are driving exponential increases in corporate capital expenditure (capex) far above consensus estimates.
Deglobalization, prompted by escalating geopolitical rivalry — especially between China and the US — and concerns about the fragility of global supply lines.
Growing demand for power, which is amplified by both energy-intensive AI and reshoring of manufacturing.
Electrification of the grid combined with a continued drive to invest in alternative sources of energy generation.
“Revenge” spending on physical assets after a prolonged period of underinvestment where markets favored asset-light business models with a focus on R&D and intellectual property investments.

Impetus for higher economic growth

In combination, the size of these additional private nonresidential investment flows (Figure 1) is such that they could materially alter the course of the US economy. Typically, investment in physical assets tend to have much larger positive multiplier effects on economic growth than the asset-light business models that until now have dominated the market.

Figure 1

It is too early to tell whether this new industrial revolution will materialize, given the long history of false starts in US industrial renaissance and the risk that heightened geopolitical turmoil could derail the global economy. Nevertheless, I see several reasons why, for now, data has been surprising on the upside relative to surveys, including:

The nature of the capex — The amounts announced already exceed the money spent during the last capex pickup, when shale gas production was ramped up. Based on the amounts committed alone, we can expect an above-inflation growth rate in private nonresidential structure and equipment spending for several years to come. Importantly, some of the mega-caps are able to finance their capex without external funding, thus sidestepping public credit markets as these have become less willing to fund capital-intensive infrastructure projects with long payback periods.
Productivity gains resulting from AI capex — AI is already delivering productivity gains, with companies reporting return on their investment (ROI) at a much faster rate than was the case for previous technology breakthroughs. This acceleration in ROI, in turn, further reduces the need for external funding.
The urgency and scale of the investments needed — After a prolonged period of underinvestment, there is an urgent need for physical investments to upgrade aging US infrastructure.
The resilience of the US consumer — A weakening US consumer would undo much of the additional growth momentum generated by this incipient industrial revolution given how crucial consumer spending is to the overall economy and I am therefore monitoring this risk closely. However, despite some signs of increased vulnerability, consumers — even at the lower income spectrum — appear to be more resilient than markets assume. Consumer balance sheets remain robust, though excess savings are now largely spent, and while AI may eventually lead to job losses, workers’ bargaining power has increased for now, at least. Many consumers also still benefit from the wealth effect of increased house prices, while real incomes are continuing to rise thanks to the drop in inflation.

On balance, therefore, I think the US economy is structurally positioned to deliver higher-than-anticipated growth and that even if a recession were to materialize, it would likely be shallow.

Important implications for monetary policy

This structural growth momentum coincides with still extraordinarily loose fiscal policy and growing public debt levels across much of the developed world. And while central banks have started an easing cycle to support economic growth, inflation remains in many cases above their target and is likely to pick up again. I therefore believe that the yield curve will eventually steepen and that rates will remain at higher levels than markets currently price in as a combination of stubborn inflation and the need for additional government deficit funding will curtail the ability of the Federal Reserve and other developed central banks to cut rates. The eventual adjustment to this reality of what our macro strategists call “the new economic era” — with higher and more volatile inflation and shorter and more pronounced economic cycles — will inevitably entail more volatility.

Portfolio positioning for this new reality

How can investors position for the significant risks and opportunities this new environment brings? There is clearly no uniform answer but one potentially attractive avenue, in my opinion, is to adopt a total return approach that enables dynamic pivots across a wide opportunity set.

Specifically, at this unpredictable stage of the cycle, I think such an approach allows investors to:

Avoid taking on excessive credit or duration risk while still achieving attractive yields, by taking positions at the shorter end of the curve and away from those segments of the credit market where I think spreads have become exceedingly tight.
Avoid having to make an “all-or-nothing” call on whether we will see a continuation of growth surprises or move into recession.
Lean into either scenario. While I am bullish that the growth scenario will prevail, I think such a positioning also offers investors the potential to take advantage of the associated volatility when other market participants may be forced sellers. Such flexibility could be particularly advantageous if we are truly entering a new era of industrialization with the US as its epicenter.

Expert

Connor Fitzgerald

, CFA

Fixed Income Portfolio Manager

Related fund

Wellington Credit Total Return Fund

A long-only cash and bond fund seeking long-term total returns by investing primarily in US Dollar-denominated treasuries, corporate bonds and emerging markets issuers.

View fund page

© 2024 Morningstar, Inc. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. The Overall Morningstar Rating for a fund is derived from a weighted average of the three, five, and ten year (if applicable) ratings, based on risk-adjusted return. Past performance is no guarantee of future results.

The content within this page is issued by Wellington Management Singapore Pte Ltd (UEN: 201415544E) (WMS). This advertisement or publication has not been reviewed by the Monetary Authority of Singapore. Information contained on this website is provided for information purposes and does not constitute financial advice or recommendation in any security including but not limited to, share in the funds and is prepared without regard to the specific objectives, financial situation or needs of any particular person. 

Investment in the funds described on this website carries a substantial degree of risk and places an investor’s capital at risk. The price and value of investments is not guaranteed. The value of the shares of the funds and the income accruing to them, if any, and may fall or rise. An investor may not get back the original amount invested and an investor may lose all of their investment. Investment in the funds described on this website is not suitable for all investors. Investors should read the prospectus and the Product Highlights Sheet of the respective fund and seek financial advice before deciding whether to purchase shares in any fund. Past performance or any economic trends or forecast, are not necessarily indicative of future performance. Some of the funds described on this website may use or invest in financial derivative instruments for portfolio management and hedging purposes. Investments in the funds are subject to investment risks, including the possible loss of the principal amount invested. None of the funds listed on this website guarantees distributions and distributions may fluctuate and may be paid out of capital. Past distributions are not necessarily indicative of future trends, which may be lower. Please note that payment of distributions out of capital effectively amounts to a return or withdrawal of the principal amount invested or of net capital gains attributable to that principal amount. Actual distribution of income, net capital gains and/or capital will be at the manager’s absolute discretion. Payments on dividends may result in a reduction of NAV per share of the funds. The preceding paragraph is only applicable if the fund intends to pay dividends/ distributions. Performance with preliminary charge (sales charge) is calculated on a NAV to NAV basis, net of 5% preliminary charge (initial sales charge). Unless stated otherwise data is as at previous month end.

Subscriptions may only be made on the basis of the latest prospectus and Product Highlights Sheet, and they can be obtained from WMS or fund distributors upon request.

This material may not be reproduced or distributed, in whole or in part, without the express written consent of Wellington Management.

Office locations

Contact us

OUR FUNDS

LITERATURE

Wellington credit total return fund

Wellington credit income fund

Asset classes

Over 95 years in active fixed income investing

Elevate your investments with Unique perspectives

Explore our insights

insights by topic

Is your portfolio keeping pace in 2025?

About us

contact us

Media & Press

Are bond investors ready for a US industrial revolution?

A potentially structural story

Impetus for higher economic growth

Important implications for monetary policy

Portfolio positioning for this new reality

Expert

Related fund

Read next

FUNDS

insights

About Us

contact us

legal Information

Follow us

Contact us

Are bond investors ready for a US industrial revolution?

Share this page

A potentially structural story

Impetus for higher economic growth

Important implications for monetary policy

Portfolio positioning for this new reality

Expert

Related fund

Share this page

Read next

FUNDS

insights

About Us

contact us

legal Information

Follow us