European corporate investment is set to rise after a tough period and shares of firms in the industrial, technology and oil service sectors stand to benefit the most.
After two years of investment cuts to survive financial turmoil and economic recession, firms in Europe are preparing to loosen their grip on spending as earnings improve, financial strains ease and growth in emerging markets remains strong.
Raising capital expenditure will be a vital plank of corporate strategy if firms want to maintain competitiveness or tap fast-growing economies such as China and India at this juncture in the economic recovery.
"If you can sell products in the growing markets in Asia and so on, then low interest rates justify some investment in capital expenditures," said Mark Bon, fund manager at Canada Life in London.
Mr Bon sees "modest improvement" in European firms' capex, and picked cable firms such as Belgian steel cable maker Bekaert and Italian cable maker Prysmian as examples of firms which would benefit from rising capital expenditure.
Industrials, technology companies and oil services firms are all expected to benefit when the pick up in manufacturing activity shown by recent purchasing managers' surveys feeds through to corporate investment.
Investment by firms in the eurozone fell 0.8 per cent quarter-on-quarter in July-September of 2009, an improvement from the 1.6-per cent drop seen in the previous quarter and the sharp 5.4 per cent drop of the first quarter of 2009. "The key drivers for capital spending are positive and from these levels it should clearly go higher," said Mislav Matejka, European equity strategist at JPMorgan, noting that capex levels were below depreciation rates in the United States and Europe.
"Banks' lending standards are becoming more relaxed, so access to credit, at least for the larger corporates, is getting better. Profits for the last two, three quarters have been surprisingly positive. Companies are getting more and more comfortable."
There are signs firms are already comfortable enough to talk about raising capital expenditure.
For example, Bekaert said last week it would invest further in emerging markets to meet demand and UK-listed Mexican silver miner Fresnillo said that its capex would be raised by 53 per cent to $435 million in 2010 to boost output.
Another miner, Rio Tinto said last month it expects its 2010 capex to be at least $5 billion and saw potential for a further $1 billion of new investments.
Such plans are prompting some bankers to bet on gains in sectors which usually profit from higher capital expenditure.
Barclays Capital has an overweight recommendation on industrial goods & services, technology and oil services firms, part of the Europe 600 oil and gas index.
Tech stocks, with one-year forward price-to-earnings at 15.3, are already the top performing sector in Europe, up eight per cent this year, while industrials, which have a one-year forward P/E of 15.4, have gained four per cent.
By contrast, banks have fallen 5.1 per cent to become the third worst performers in the region. The banking sector carries a one-year forward P/E of 11.1, according to Thomson Reuters data.
Among its preferred sectors, BarCap in particular picked tech and oil services stocks such as ASML, STMicroelectronics, Infineon, Saipem and Technip.
"Looking into one, two, three years' view, it's hard to envisage that sales grow without some sort of capex," said Nick Nelson, European equity strategist at UBS.
UBS expected European corporate earnings to grow 25 per cent this year, slightly lower than consensus estimates of a 27 per cent increase versus the year before. European companies were expected to report a 20 per cent decline in earnings in 2009.