The sudden and rapid return to inflation has not only made everyday life more expensive, but it has also dramatically increased the cost of doing business. and are grappling with rising costs of labor, supplies and services.
This shift is driving historic investments in services and technology that can mitigate the effects of inflation. This is good news for companies focused on improving productivity. As companies expend more capital to boost profit margins, Morgan Stanley Research analysts see investment opportunities in companies developing productivity-enhancing technologies, especially automation and digitization, where barriers to entry are high. I think.
“With infrastructure now at the forefront of the political climate and rising labor and capital costs, companies are likely to invest in technologies that can increase productivity and reduce the cost of doing business. Yes,” said Josh Pokrzywinski of US Electrical Equipment. Multi-industry analyst at Morgan Stanley Research. “We believe that companies that offer innovative and cost-effective solutions will be in high demand and gain a competitive advantage in their respective industries.”
Technology has had a significant impact on cost reductions for many years, but that impact has been overshadowed by decades of deflation driven by slowing population growth and globalized manufacturing collective factors. became. But that narrative has been upended by COVID-induced supply chain bottlenecks, heightened geopolitical tensions, and growing concerns about energy security. This changing landscape should lead businesses to prioritize spending that helps increase productivity, reduce costs, and improve profitability.
In the United States, the average age of private fixed assets such as real estate, factories, and equipment is at its highest level since the 1950s, contributing to a two-decade decline in productivity growth. But historically underinvestment in productivity gains highlights the value of automation and digitization. Especially as governments focus on investing in infrastructure rather than lowering interest rates to cut deficits.
“Ultimately, we believe the incentives are in place for organizations to refocus on automation and productivity-enhancing technology,” Pokrzywinski said. “Companies that are able to offer such solutions to their customers are likely to benefit from the expected increase in prices and volatile economic environment over the next decade, offering a relatively attractive risk-to-reward investment proposition. Offers.”
While maintaining strong barriers to entry, what Morgan Stanley analysts call “deflationary enablers,” it encourages clients to increase productivity and reduce costs through automation, efficiency, or lowering their own cost curves. The companies we support make attractive investments in an inflationary environment.
Prior to the pandemic, these deflationary valuations were broadly in line with the MSCI World Index, which tracks large- and mid-cap stocks in developed markets. These companies saw valuation spikes that lasted through the end of 2021, but the trend reversed earlier this year. Recently, companies identified as providing technology and services to reduce costs and increase efficiency are being traded at discounted prices to the broader market.
Companies that help fight inflation appear to be undervalued.
There are three main technologies that are relevant to most sectors, are at a long-term inflection point, and stand out as enabling deflation. Artificial intelligence, clean energy, mass energy storage and mobility.
artificial intelligence
AI models are improving faster than traditional models predicted, thanks to cheaper and increasingly powerful computing power. For example, the biotech sector has used machine learning and AI to discover new drugs cheaper, faster and more efficiently. Morgan Stanley believes this trend will lead to dozens of new treatments that he believes could create a $50 billion market over the next decade. AI has the potential to have a transformative impact in other industries as well, and is an opportunity for investors as many companies are currently undervalued relative to the broader market.
clean energy
The transition away from fossil fuels is a long and delicate balance complicated by growing concerns about geopolitics, climate change and energy security, and is ultimately expected to be highly inflationary. Morgan Stanley believes companies with unique clean energy technologies and few competitors can improve their margins and offer better value to investors by investing more. Many cleantech stocks do not price in strong growth prospects, with analysts pointing investors to companies benefiting from the widening spread between rising utility bills and falling clean energy costs. recommended.
Large energy storage
Cheaper and more widely available storage batteries have the potential to transform many industries. For example, long-distance heavy-duty trucking has been severely pressured by rising labor and fuel costs and labor shortages. A move to battery-powered vehicles could reduce costs and help offset these costs. Advances in high-capacity energy storage are expected to aid the further development of electric vehicles and, ultimately, self-driving cars. Currently, battery technology is far from reaching its full potential, so investors are hoping that the technology will become cheaper, allowing more end-users to use their products and services to reduce costs. It should be noted that over time, the overall market served by companies in this space will expand significantly. .
AI, clean energy, and high-capacity energy storage are broad technology categories to combat the effects of inflation, but they are not the only ones. Other technologies meet the needs of specific industries. “These are airlines that have to find ever more innovative ways to offset rising jet fuel prices, from automated tools designed to reduce increasingly expensive headcount within their organizations. It comes in all forms and functions, all the way down to cost-saving booking software for customers,” says Pokrzywinski.
Morgan Stanley analysts say investors should consider a wide range of companies that offer services that use automated technology for other investment opportunities amid expectations of prolonged inflation. . This includes robotics used in manufacturing, software that optimizes business processes, and IT hardware for things like self-checkout. Technology — Helping clients manage the current inflationary environment.
For more information on Morgan Stanley research into technologies that may address the impact of inflation, please contact your Morgan Stanley representative or financial adviser For the full report, “The Deflation Enablers” (July 20, 2022). Morgan Stanley Research clients have direct access to reports here. moreover idea From thought leaders at Morgan Stanley.