Cash-rich Companies Still Averse to Spending

There has been little sign so far this year of a predicted increase in capital expenditure globally by cash-rich companies, according to Standard & Poor’s (S&P).

The credit ratings agency (CRA) reports that companies worldwide continue to have historically high levels of gross cash, estimated at US$4.5 trillion for the top 2,000 companies worldwide. Despite this, S&P said that based on data for the first half of 2014, spending is likely to be 0.5% down in real terms on top of a 1% decline last year.

“There was a lot of hope that a clear improvement in the economic cycle might trigger the second stage when companies feel more comfortable and start spending their cash,” Gareth Williams, corporate economist at S&P London, told the
Financial Times
. “For a variety of reasons this isn’t going to happen and it raises questions about the robustness of the recovery this year.”

A decline in capital expenditure is even more pronounced among companies in the emerging markets (EMs). S&P is predicting that following a 4% year-on-year (YoY) decline in 2013, a similar reduction is likely this year.

“The balance [of global capex] has shifted dramatically in the last decade and one of the things that leaps out at you is how many of the biggest capex spenders are based in China, Brazil, Russia and India,” said Williams “Maybe there is a bigger process of adjustment happening in the EMs than is appreciated.”

The aversion to spending extends to companies in the commodity sectors, which have historically had the highest levels of capex. S&P reports aggressive cuts to capital expenditure at major metals and mining companies such as BHP Billiton, Vale and Rio Tinto, while capex also appears to have plateaued at companies in the global oil and gas sector, such as Petrobras, Chevron, Gazprom and Total.

S&P also found that while companies continue to hold high levels of cash, leverage at the top 2,000 investment spenders has increased YoY. Globally, net debt rose from US$10.2 trillion in 2012 to US$11.1 trillion in 2013, and leverage – measured by net debt to total assets – was 24%, up from 21%.

However, the CRA added that there were reasons to feel optimistic about a future pick-up in investment including plentiful cash at many companies, ageing capital stocks and an improving global economy. The IT, healthcare and telecoms sectors were increasing their investment. The researchers also said market analysts consistently underestimated prospects for capex.

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