European shares have outpaced their U.S. counterparts this year, boosted by a calmer political outlook and an improved economic backdrop. To maintain that outperformance, companies in the region will need to invest in their businesses -- and there are encouraging signs that they might just do that.
They have plenty of firepower available. Moody's Investors Service analyzed almost 700 non-financial companies in Europe, the Middle East and Africa, concluding that their cash balances climbed 6 percent last year to 974 billion euros ($1.1 trillion). As a percentage of revenue, Moody's reckons cash is at its highest since the financial crisis.
A McKinsey & Co. survey of 2,000 executives in France, Germany, Italy, Poland, Spain and the U.K. taken in February and March showed about half of the respondents were saving for future investments, and half were building defenses against future crises. But there's evidence that companies are starting to utilize those reserves to boost investment in the euro zone, with capital expenditure expanding at a faster pace in the past two quarters than economists had predicted.
Moreover, the purchasing manager indexes produced by IHS Markit for the manufacturing sector show that the subsets for technology gear and machinery and equipment are setting the pace for growth.
Both sectors tend to be bellwethers for corporate capital expenditure, according to analysts at Bank of America Merrill Lynch. As a result, they predict that capex in Europe will jump by 20 percent this year to 1.5 trillion euros, a post-crisis high.
Restoring business investment to the levels seen prior to the crisis could add as much as 1 trillion euros to European gross domestic product, according to McKinsey estimates. Its survey suggested that concern about the European political landscape was a key inhibition for executives. Those worries should be dissipating.
The election of French President Emmanuel Macron and the anticipated reinstatement of Chancellor Angela Merkel at Germany's forthcoming plebiscite cements the European Union leadership's key partnership. The U.K. decision to leave, meantime, seems to have galvanized the bloc's resolve to get its act together.
And the economic outlook is sufficiently improved for the European Central Bank to consider tapering its quantitative easing program this autumn. Time, then, for European companies to loosen the purse strings and start deploying the cash they've built up.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
To contact the editor responsible for this story:
Edward Evans at firstname.lastname@example.org