The inflation argument that predicts another good decade for technology investing – CNBC
As inflation keeps flirting with 40-year highs, we know what the Fed is doing to fight back: raise interest rates. But exactly what can businesses do to fight back beyond raising prices on customers?
That question is newly relevant with the latest pumpiing data upon Wednesday. It was a sign that the economy is making progress against inflation. The particular Labor Department said consumer prices rose 8. 5 percent for the 12 months that ended in July, which represented a leveling off of inflation much better than in recent weeks, driven by the falling price of gasoline after a surge that began in December 2020. Gas prices dropped nearly 8 percent within July. The rate associated with inflation excluding volatile food and energy segments climbed 0. 3 percent, down from 0. 7 percent in June.
But can corporate America and the markets count on the pumpiing lull in order to last?
“This is the much better report than what I expected, ” former Obama administration chief economist Jason Furman told CNBC’s Squawk Box on Wednesday. “This could easily be the particular false dawn that we saw in September 2021, but for now I’ll take it as a tick within the great direction. inch
Ann Milleti, Allspring Global Investments head of active equity, informed CNBC upon Wednesday that there’s a sense of relief from the latest inflation data, but in the bigger picture, she cautioned that inflation is here to stay. “What you want to own are companies that can outperform, management teams who have lived through previous cycles before, cycles that are changing, ” Milleti said. “Regardless of what the Fed does, we know rates are going higher. We understand that pumpiing is likely to be higher than it was over the last decade in the next decade. So you want to pick businesses that are better positioned for that type of environment than the previous environment we have lived through. ”
Companies will spend more on technology
One set of answers to the higher-for-longer inflation argument circulating on Wall Street comes from Morgan Stanley , in the particular form of a 60-page report released this summer called “The Deflation Enablers. ” Led by industrial research director Josh Pokrzywinski, the report makes the case that a big change is coming in how corporations think about allocating capital after the particular end associated with the low interest rate era.
“The cost of capital is on the rise, which we think will push companies in order to invest with regard to future growth as opposed to corporate buybacks and other financial engineering, ” the particular Morgan Stanley report says. “Physical [capital spending], when executed right, tends to be deflationary. ”
This belief led a team of 31 credited analysts to come up with a series of investments that companies – and investors – should be focusing on as executives allocate more spending for productivity gains and to drive pumpiing lower over the next several years.
The Morgan Stanley report is dominated by technologies whose names have become familiar: artificial intelligence, clean energy, robotics, software innovation and even thoroughly clean commercial heating and air conditioning advancements that can quickly pay for themselves in efficiency savings. All of these technologies are usually dropping quickly in price and ramping up in effectiveness, plus that implies that goods and services made with them will be significantly cheaper over the next several years.
Some of the examples Morgan Stanley cites are familiar; others much less so.
AI, for example, has little-appreciated importance in order to accelerating the particular advance of biotechnology plus pharmaceutical development, according to Morgan Stanley analyst Vikram Purahit, letting businesses eliminate unpromising experiments rapidly and hone in faster on compounds which are clinically promising, cutting time regarding preclinical drug development because much since 75% and reducing early-stage development costs by up to half.
Another is within the seemingly low-tech business of long-haul trucking. Labor and fuel costs possess been driving freight expenses to new highs. The Labor Department reported that costs intended for delivery services like United Parcel Service and FedEx have risen 14 percent in the last 12 months and wages in the particular sector have got accelerated amid a shortage of drivers.
But trucks that will use autonomous-driving technology plus electric engines can solve both problems, according to Morgan Stanley analyst Ravi Shankar. Near-fully autonomous traveling must be available by late next year from San Diego-based TuSimple, which usually went public in 2021 and is partly owned simply by United Parcel Service. FedEx chairman Fred Smith told CNBC’s Jim Cramer in March that his company wants to introduce driverless trucks in 2022, and Fedex announced the pilot AV program within May.
“We believe 70 percent associated with cost savings are in play from the adoption of these systems together, inch Shankar wrote, and he added, “We expect at least some of these to be passed along in order to shippers. ”
But the biggest bucket of investment to fight inflation may occur in energy.
There’s an emerging split between “inflationary” traditional energy and “deflationary” clean energy, published Morgan Stanley utility expert Stephen Byrd, a split highlighted by this year’s surge in oil plus natural gas prices. One example: Futures prices to get electricity supplied to Texas in 2023 are upward 65 % this year, while fuel cell manufacturer Bloom Energy will be cutting manufacturing costs as much because 10 percent a year. Electricity supplied simply by Bloom in order to commercial customers is now almost 20 percent cheaper than the national average, Byrd said.
Similarly, power generated by Sunrun ‘s rooftop solar systems in California is now cheaper compared to juice through the local utility, thanks to a big jump within utility pumpiing in the last year. The new inflation data did not show a deceleration in utility prices, partially because the market price associated with gas remains three times increased than pre-pandemic levels, complicated by disruptions in Russian supplies.
“Clean energy may, in the particular long term, be disruptive to conventional electricity suppliers, especially utilities along with high and rising customer bills, above-average exposure to physical risks from climate change, and challenges in ensuring adequate energy supply to its customers, ” Byrd wrote.
Arguing pumpiing and efficiency gains
The report met with a mixed reaction from outside experts. The basic idea is usually well-known to those who follow innovation: technology is simply by its nature deflationary.
inch[It’s an] interesting piece, ” said Michael Mandel, chief economist of the Progressive Policy Institute plus lead author of its Innovation Heroes reports, highlighting companies that invest heavily in order to chase productivity gains. “[It] fits very closely to our Investment Heroes statement, and [with] low inflation in the particular digital sector. ”
Mandel argues that will inflation has spiked partly because of low investment by corporations during the Covid pandemic.
But less impressed was Robert Cantwell, portfolio manager of the Compound Kings ETF in Nashville, who thinks Morgan Stanley’s experts went too far in the number of technologies cited.
“Deflationary developments don’t arrive from funds intensive activities like the renewable energy transition or EVs, inch Cantwell stated. “Capital-light technology, like card networks and social networks, have deflationary potential, but it’s really hard to measure. ”
None of this means policy makers and markets can take their eye off short-term pumpiing pressures, mentioned Sylvia Jablonski, chief investment officer at Defiance ETFs, whose funds focus upon disruptions including quantum computing and hydrogen energy.
“Politics, Washington, plus the Federal Reserve have arguably the largest impact on the state associated with inflation, and this cannot be ignored, ” Jablonski said. “However, there are a lot of factors which can contribute in order to demographic trends, lead to the technological revolution and really shift the way that the economy and society operate. inch