Politics’ Possible Influence on Capital Expenditure

Good Morning Ladies and Gentlemen

”And I’ll keep my cool, but I’m feigning.”

Macy Gray in her iconic song “I Try”

An editor at the Frankfurter Allgemeine Zeitung newspaper once coined the term ‘insufficiency terrorists’ (Insuffizienz-Terroristen) to describe a phenomenon. It refers to managers who fail to recognise their shortcomings and force those around them to adapt to their weaknesses. What causes frustration in companies and leads to economic decline becomes a national threat in the government apparatus. Incompetent ministry leadership can plunge an entire state into chaos.

A Slump in Corporate Earnings

Regrettably, we do not reside in a perfect world, and we acknowledge that. While many people remember the global financial crisis, they tend to overlook that from 2000 to 2002, corporate earnings fell by 40%, much like during the global financial crisis. The question is, why did this downturn happen?

The Reason

The primary cause of this downturn was the significant reduction in capital expenditure (capex) in 2001, which resulted in an immediate and sharp decline in earnings. When investment spending came to a halt, earnings followed suit without delay. Business leaders require a baseline of rule-based political and economic stability to feel assured that investments in new production facilities, infrastructure, information technology, and workforce development will yield positive returns over time. I am concerned that the current U.S. administration may be somewhat dogmatic regarding tariffs and may not fully recognise the associated economic risks.

Share Price Valuation

What do you think would occur with share prices, indices, and so on if corporate earnings were to decline significantly by 40%, similar to what happened 24 years ago? I assume that valuations would need to be recalibrated to reflect this new reality, which includes lower earnings and growth potential, potentially resulting in a contraction of the price-to-earnings (P/E) ratio.

Futhermore

In addition, BCA (Bank Credit Analyst) Research asserts that tech-related capital expenditures have peaked. I strongly believe as of now, this perspective is not reflected in Nvidia’s current stock price. Analysts are predicting a 35% revenue growth over the next several years. As noted by The Financial Times, even if these projections are met, it remains challenging to justify the existing valuation: “If you sum the analysts’ estimates of free cash flows for the next five years and discount them back at a 10% rate, the total comes to only $650 billion. This implies that the remaining $3.8 trillion in enterprise value represents cash flow from 2030 onward.”

Conclusion

In response to the imperative for prudence and in recognition of the commendable performance demonstrated to date during the current fiscal year, we have implemented a strategic reconfiguration of the portfolio structure within our Private Client division. This adjustment encompasses the realisation of profits and a heightened allocation of liquid assets, aimed at mitigating the risks associated with what can be characterised as ‚insufficiency terrorism‘ in financial management.

Ladies and Gentlemen

Feel free to send your messages to smk@incrementum.li. Many thanks, indeed!

I wish you an excellent start to the day and weekend!

Yours truly,

Stefan M. Kremeth
CEO & Head of Wealth Management
Incrementum AG – we love managing assets

Tel.: +423 237 26 60
Cell: +41 79 303 48 39
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9494 Schaan/Liechtenstein
Mail: smk@incrementum.li