Nigel Yates, UK equity portfolio manager at BNP Paribas Asset Managers, considers the arrival of a new era for equity investors.
For most of my career, capital expenditure was the line in the accounts that finance directors defended and investors quietly penalised. The winning formula of the 2010s was asset-light: software margins, buybacks, and capital returned rather than deployed.
That era is over.
We are now in the middle of the largest synchronised capital investment cycle I have seen, global in scale and driven by technology, security and decades of under-investment in the physical fabric of our economies. And the UK, for once, is not a bystander.
I see four powerful trends that have the potential to create big opportunities: AI, housing, defence and water.
AI, power and the physical economy
Start with the numbers that dwarf everything else. Goldman Sachs estimates that AI-related investment worldwide will reach roughly $1tn this year.1 These are not software numbers. They are orders for concrete, steel, transformers, switchgear, cooling systems, cabling, turbines and grid connections.
And that is the point many investors still miss: the AI boom is, at root, an industrial boom.
Every data centre needs power, water, land and civil engineering. The bottlenecks (high-bandwidth memory, grid capacity, skilled electricians, planning consent) are physical, and physical bottlenecks create pricing power for whoever owns the scarce inputs. I would rather own the companies selling picks and shovels into this build-out than try to guess which model provider wins.
Housing: “Your First Home” and the housebuilding supply chain
Ahead of Labour conference in Liverpool, the Prime Minister unveiled “Your First Home”, a new equity loan scheme for first-time buyers in England purchasing new-build properties. Buyers will need a deposit of just 2.5%, with the state providing an equity loan worth 20% of the property’s value and an initial interest-free period.2
The direct beneficiaries are the obvious ones: volume housebuilders and the lenders active at higher loan-to-value.
But I think the more durable opportunity sits one step back: brick, block and aggregates producers, timber-frame and modular suppliers, builders’ merchants, and the civil engineers who put in the roads, drainage and utility connections before a single house goes up. Demand stimulus without infrastructure simply creates queues.
Defence: from cost centre to industrial strategy
The Defence Investment Plan, published at the end of June after months of fraught negotiation, sets out total spending of around £298bn over the four years to 2029/30.3 The government has also reaffirmed its commitment to the NATO target of 3.5% of GDP by 2035.
For investors, two features stand out:
Visibility: long-dated programmes give prime contractors and their tier-two suppliers a rare multi-year line of sight on revenue.
Sovereignty: the direction of travel is towards ‘buy British by default’, sovereign munitions capacity and domestic supply chains, which favours UK-listed manufacturers and mid-cap engineers.
After years in which ESG screens pushed many UK funds away from the sector, the opportunity set has broadened considerably. The risks are execution and cost overruns, which have dogged British procurement for decades, and the possibility that fiscal pressure trims budgets at the margin.
Water: the most contentious, and most compelling, capex story
If I had to pick one UK sector that best captures this cycle, it would be water. Ofwat’s PR24 settlement allows around £104bn of investment across England and Wales over the 2025–30 AMP8 period, the largest programme in the industry’s history.4
The listed companies are now investing to meet the requirements outlined in the original plan. United Utilities raised its AMP8 capital guidance to around £11.5bn from £9bn and launched an £800m equity raise, citing housing growth, industrial development and – tellingly – rising water demand from data centres.5
That ties the themes of this note together neatly: new homes, new factories and new data centres all need water and wastewater capacity before they can be occupied or switched on. This summer’s drought, with July the driest month in England in 190 years of records, has underlined how thin resilience margins are.
How I am positioning
Pulling this together, my stance has four elements.
- Enablers over the spenders: electrical equipment, grid, civil engineering and specialist manufacturing that sell into several capex themes at once.
- UK mid-caps with domestic infrastructure and defence exposure, where valuations still reflect years of neglect rather than the order books now in view.
- Selected regulated utilities with growing asset bases and manageable gearing, while avoiding balance sheets that depend on political goodwill.
- I am taking a tactical view on housebuilders: the new scheme is a clear positive for demand, but I want to see the Budget detail, and evidence that supply can respond, before paying up.
Across all four, the common filter is this: I want businesses with a long record of self-funded reinvestment at high returns, not just exposure to a fashionable spending theme.
The risks are real. Inflation could stay higher for longer, lifting both borrowing and construction costs. Skills shortages could cap delivery. AI spending could correct sharply. And Britain has a long record of announcing infrastructure faster than it builds it.
But the direction is clear. After a decade in which markets rewarded companies for spending as little as possible, they are now rewarding those that build, supply and maintain the physical economy. For a UK investor, that is a welcome change, and 28 October will tell us how much of it the Treasury is prepared to underwrite.
[1] Global AI Investment Is Forecast to Exceed $1 Trillion in 2026 | Goldman Sachs
[2] New first-time buyer scheme to be confirmed at Budget – GOV.UK
[3] The Defence Investment Plan – GOV.UK
