Capital Expenditures May Be Last Cloud Raining on Global Economy

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Investors in publicly-traded companies are eager to see them spend some of the cash amassed since the 2008 financial crisis. Not unlike penny-pinchers that survived the Great Depression, US firms turned to saving during the Great Recession. Standard and Poors (S&P) explains that large firms remain unwilling to part with their proverbial security blanket and pacifier in the form of enormous cash hoards. In its annual capex corporate survey, S&P describes that capital expenditures are the “missing link to a better established and self-sustaining economic recovery.”

Capital expenditures are expected to grow just 1.2% for members of the bellwether S&P 500 Index in 2014, according to market data firm Factset. This would be the slowest pace of growth in four years. While stingy energy and materials companies pare back capex, technology and telecom firms are expected to deliver a sole ray of sunshine with growth of 8% this year. That might help explain why investors continue to favor them for five years running. Excluding energy and materials, S&P expects global corporate capex to grow by 2.6% in 2014. Including those sectors, the forecast calls for a dismal decline of 0.5%.

Although IT spending remains strong given its rapid ability to reduce labor costs and other expenses, most firms remain hesitant to invest in long-term assets or large scale projects necessary to assure investors about future growth prospects. Investors keen on a more accelerated march to economic prosperity may need to plead with chief executives still battle-scarred by 2008-09. Corporate confidence in fickle bank lending has yet to recover, leading companies big and small to live with less and invest more shrewdly, running businesses with padded balance sheets in anticipation of another (although unlikely) global economic meltdown.

Investors may expect multi-national firms to have higher capex projections for their hottest growth markets including Brazil, Africa, India and China. Yet divisional chiefs in these markets no longer receive carte blanche on spending from their boards as profits fell in dollar terms over the past few years with broad weakness and volatility in local currencies. This may not be as scary a phenomenon as the Asian Flu of 1997-98, but the trend bears watching given that capex is on shaky ground even from a global perspective.


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