A lasting capex boom to thrive in post-pandemic era
September 15 2021 12:10 AM
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Despite the overarching gloom perpetuated by the still raging pandemic, silver linings of hope are now encouraging companies to start spending across the world.
Reason: As lockdowns are gradually lifted across the rich world, people are going out and spending.
Globally, corporate capital expenditure, or capex, will jump by 13% this year, according to S&P Global Ratings, with growth in all regions and broad sectors; especially in semiconductors, retail, software and transportation.
Forecasts for business investment look rosier, too.
Analysts at Morgan Stanley predict a “red-hot capex cycle”. Overall global investment, they reckon, will soar to 121% of pre-recession levels by the end of 2022.
Oxford Economics argues that “the time looks right for a boom in capex”, while HIS Markit forecasts that global real fixed investment will rise by more than 6% this year.
Companies look poised to start splashing out some of the cash they hoarded during the coronavirus pandemic, according to a report by Janus Henderson Investors in July.
Firms hold record cash reserves of $5.2tn, after adding $1.1tn to their “war chests” during 2020, the investment management firm said. That amount was almost twice the sum of the previous five years combined.
In the US, business spending on equipment, structures and software has averaged an annualised 13.4% in the year through the second quarter, the strongest pace since 1984.
Europe is also set for a surge in spending, with S&P predicting a 16.6% increase in 2021; its best year since 2006.
Business investment in the UK has also started to recover, but is still more than 15% below its pre-pandemic level at the end of the second quarter.
In Japan, manufacturers facing the chip crunch are leading a recovery in capital investment.
Climate change, which is forcing companies to retool operations as governments push through clean energy policies, supports too.
A record $174bn was invested in solar, offshore wind and other green technologies and companies in the first half of this year, according to data from BloombergNEF, with much more needed to curb carbon emissions.
But the spending explosion will cause net debt to increase, even if the total remains broadly flat, Janus said.
Net debt, which represents a company’s total debt minus cash, is set to rise by $500bn-$600bn this year to almost $9tn in the asset manager’s corporate debt index.
The positive flipside is that the prospect of higher economic growth promises better cash flow and improved debt leverage ratios.
This, combined with continued central bank stimulus and low default rates, prompts the portfolio managers to look for opportunities among rising stars, or companies upgraded from a junk rating to high-grade.
To be sure, the growth dividend depends on the promised spending being delivered.
There’s a worry that capex will lose momentum as consumer demand cools or that a goods shortage will reverse into a supply glut once the pandemic’s acute phase passes.
Economists also say some of the investment may not be as productive as it looks, which would leave much promised jobs and plants looking more like hype than reality.
That said, for now, companies are betting they have more to lose from not upgrading.

Last updated: September 15 2021 12:12 AM


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