As a result of the rising geopolitical risks, including the war in Ukraine and uncertainty over the shape of future relations with China, defence spending will also rise.
“Then, in addition to that, we have got climate change [and] a transition towards net zero,” Cunningham said.
In tandem with this will be efforts to reduce reliance on certain countries for energy.
“To transition towards net zero, there needs to be a significant build out infrastructure, across all things, from expansions of electrical grids, to storage facilities, to wind turbines, solar farms, all these different sorts of things.
“Again, we think that is…more capital intensive, it is more resource intensive.”
Another potential impact will come from the under-investment in resource extraction over the past eight years in particular.
“When you have a lot of demand for resources, and limited supply, we know what that can do to prices,” he said.
Finally, Cunningham said, he thinks US household deleveraging is broadly complete.
“US household balance sheets look pretty healthy, and you've got the big millennial cohort now in the US moving through.”
This generation is in what Cunningham calls the “household formation” stage, buying houses and cars and raising families.
This is the part of life at which most families take on the highest amount of debt.
All of these forces contribute to an “inflationary impulse”, he said, in contrast to the previous cycle which had very little capital intensity, which is why it benefitted asset-like businesses, large-cap tech companies, pushing up equity markets and forcing down bond yields.
“We think this next cycle could have quite a lot of capital and resource intensity,” Cunningham said.
If inflation is higher and more volatile, central bank rates will also be more unpredictable and fast-moving, which has historically led to a higher correlation between equities and bonds.
This could prove problematic for the 60/40 portfolio which has been seen as a “safe” investment strategy, but is underpinned by equities and bonds moving in opposite directions.
“During these periods, you [also] tend to get multiple compression in equity markets, so you get a headwind to returns in general.”
When it comes to the companies that are likely to lead the next cycle, Cunningham points to companies that are involved in “building things” and contributing to the expansion of infrastructure and capacity as the beneficiaries.
sally.hickey@ft.com
