With the economic recovery seen as strengthening in
the developed world this year, investors are hoping that the 2013 momentum in
the stock markets would be sustained by companies spending some of their cash
hoards on capex - - capital expenditure investments. However, capital spending
by US companies is expected to grow this year at its slowest pace for four
years, in a sign that the corporate sector has doubts about the outlook for
global demand. Meanwhile, gross
capital investment by the US public sector dropped to just 3.6% of US economic
output last year, the lowest since 1947, compared with a postwar average of
5%. Last month Standard & Poor's said global capital expenditure is shrinking
with the fading of the commodity cycle and European companies remain relatively
constrained by weak cash flow. "Hopes for an investment-led recovery are
misplaced in our view. Our latest analysis suggests that global capex
expenditure will fall by 5% and that in Europe by 3% in in 2014 (real terms)."
A survey of non-financial companies in the S&P 500
index shows they are expected to boost capital expenditure by just 1.3% for the
year ending in June, according to Factset, a data company. The Financial Times
says that spending by companies in the S&P 1200 global index increased by 15% in
2011 and 11.3% in 2012, but it was unchanged in the first six months of 2013
compared to the equivalent period of the previous year, according to S&P Capital
IQ, another data company.
Meanwhile, in the
Bank of America Merrill Lynch survey for January, 58% of fund managers said
they wanted companies to prioritise capital expenditure over other uses of cash
flow, the highest number since the survey began in 2001 [see
According to Thomson Reuters data, big
companies around the world held almost $7tn of cash and equivalents on their
balance sheets at the end of 2013 -
- more than twice the level of 10 years ago. Capital expenditure relative to
sales is at a 22-year low and some strategists reckon the typical age of fixed
assets and equipment has been stretched to as much as 14 years from pre-crisis
norms of about 9 years.
Reuters says many argue that the hoarding is driven
by durable demographic trends and political reforms that are stirring corporate
anxiety about exposure to soaring pension and healthcare costs as workforces age
and government coffers shrink.
If that's true, then this brewing economic recovery may not release pent-up
business cash on any scale close to that suggested by the eye-popping cashpiles.
S&P said in a
report last month [pdf] that
continuing slow growth in Europe appears to be structural rather than cyclical.
The implication is that there is limited appetite or incentive for European
corporates to innovate and invest in new technology and more efficient plant and
equipment. The contrast with the US is stark. In 2008 Europe’s share of global
capex was 4% ahead of the US at 28%, but today Europe’s share has fallen to
24%, as much as 10% behind the US (see Chart 8 in report).
"Our second concern relates to the lack of a
coordinated public policy response within Europe to the challenge of cheap
energy in the US.
The growing differential in energy costs in Europe
relative to the US (see Chart 9) is starting to affect competitiveness of
industry (see Chart 10) through various channels. High and rising electricity
costs in Europe have a direct effect across most industries to varying degrees
but petrochemical and related commodity industries face particular challenges as
a result of cost differentials for (mostly ethylene derived) feedstock."
quarter of Japanese firms plan to hike capital spending in the next financial
year, a Reuters poll shows, a
sign of a cautiously positive sentiment towards a key engine for the nation's
Reuters says robust
capital expenditure is seen as critical to Prime Minister Shinzo Abe's goal of
sustainable economic growth and the survey comes after a surge in core machinery
orders for November boosted hopes that such investment is decisively turning
The Reuters Japan Corporate survey, conducted Jan
6-20, also showed that 60% of firms plan to keep their business investment
steady, which would follow an expected rebound in the country's capital
expenditure for the current financial year.
While the poll did not point to a significant
expansion, some of the 23% of respondents planning to boost investment, Abe's
policies or "Abenomics" of bold fiscal and monetary stimulus have started to
make their impact.
Reuters says the long stretch of declines in capital
spending between fiscal 2008 and 2011 led to much factory equipment and software
becoming out of date. Of the 263 firms responding to a question on what they
would invest in, 59% said they plan to upgrade ageing equipment.
corporate cash holdings of $2.8tn put recovery at risk; Top five own hoard of