Investor Animal Spirits Spread to Companies WorldwideSimon Kennedy and Rich Miller
Companies around the world are starting to share the exuberance that inspired investors last year.
As executives gather in Davos, Switzerland, this week for the World Economic Forum’s annual meeting, business confidence is rising, with a weekly gauge compiled by Moody’s Analytics Inc. at its highest level since the survey began in 2003.
Mergers and acquisitions are surging, with $130 billion in takeover offers already announced this year. And enterprises from Microsoft Corp. to Volkswagen AG are readying plans to step up capital spending after companies have squirreled away a record amount of cash to protect against a new financial crisis.
“The animal spirits are coming back,” said Mark Zandi, chief economist for New York-based Moody’s. “This is going to be a good year” for capital expenditures and hiring.
Behind the projected upturn: increased confidence in the durability of expansion following faster U.S. and global growth late last year, the need to replace aging and out-of-date equipment, and a waning of what Zandi calls “existential fears,” including concerns about a breakup of the euro region.
A comeback is critical for the global economy and financial markets. Strategists at Goldman Sachs Group Inc. and Credit Suisse Group AG are forecasting the fastest worldwide growth since 2011 and continued gains for equities -- predicated partly on optimism spreading from investors to companies.
The MSCI World Index is up 19 percent from a year ago. Sales of high-yield, high-risk bonds set a record in 2013, and the average yield investors demand to hold bonds from Greece, Ireland, Italy, Portugal and Spain over benchmark German securities fell this month to the lowest since April 2010, Bank of America Merrill Lynch bond indexes show.
“You’d have to say that values are more stretched than they were a year ago,” former U.S. Treasury Secretary Lawrence Summers told Bloomberg Television on Jan. 6. The Davos veteran warns major economies are threatened by “secular stagnation” that even zero-percent interest rates can’t solve.
Investors may need to see more demand from consumers and companies soon if they’re going to become even more positive, according to Adam Posen, president of the Peterson Institute for International Economics in Washington.
“Continued appreciation of equities in the U.S. and Europe would require the handoff,” said the former U.K. policy maker, who is attending this week’s economic forum. “You need something more.”
Sense of Dread
Since the collapse of Lehman Brothers Holdings Inc. in September 2008, the annual get-togethers of executives and government policy makers in Davos frequently have been dominated by a sense of dread about the stability of the world financial system. A global recession and doubts about the euro’s survival only augmented the stress.
While last year’s forum was calmer, it still was dogged by worries about Europe’s economic slump, a possible hard landing for China’s economy, questions about Japanese stimulus plans and wrangling between President Barack Obama and congressional Republicans over raising the federal debt limit.
“What is fresh is we are now in less of a crisis mood,” said Ernesto Zedillo, former president of Mexico and now a professor at Yale University in New Haven, Connecticut, who’s attending the forum. “People were extremely fearful a year ago. Now we seem to be in better shape but with significant fragilities.”
The question is whether waning anxieties will stir what the late economist John Maynard Keynes called “animal spirits,” leading executives to shed their conservatism and step up investment.
At the end of 2012, large global businesses, excluding financial, sat on $4.5 trillion in cash, 73 percent more than in 2006, according to BofA Merrill Lynch. The piles totaled $1.4 trillion in the U.S., $1.1 trillion in Europe and $613 billion in Japan.
So why spend now? One reason is to ride the acceleration in global growth. The International Monetary Fund will raise its forecast tomorrow from the 3.6 percent it predicted in October, Managing Director Christine Lagarde told reporters Jan. 7. Credit Suisse and Goldman Sachs economists are penciling in expansion of 3.7 percent this year after 2.9 percent last year.
Companies already are taking note. JPMorgan Chase & Co. reports its global index of sentiment among manufacturing purchasing managers was the highest last month since April 2011.
The growing optimism is reflected in the merger market. Charter Communications Inc. said last week it is seeking to purchase Time Warner Cable Inc. for about $61.3 billion. Suntory Holdings Ltd. announced it will buy spirits maker Beam Inc. for about $16 billion. Both deals include debt.
The need to replace out-of-date equipment is another reason to spend now. The average age of capital stock has been pushed close to a record at more than 12 years in Europe and almost 17, the highest since 1970, in the U.S., Credit Suisse estimates.
Companies also may have to start spending to get on board with breakthroughs such as greater broadband connectivity and big data, according to Laura Tyson, a professor at the University of California at Berkeley’s Haas School of Business.
“There are technological reasons, as well as animal spirits, for why we can be optimistic there will be a pick up,” said Tyson, a former chairman of the White House Council of Economic Advisers.
Investors are agitating for companies to loosen their purse strings. A record number of fund managers polled last month by BofA Merrill Lynch said businesses are underinvesting, and 55 percent -- the most since December 2005 -- want the cash to be used for capital expenditures.
In the U.S., the shift already may be under way. Orders for nonmilitary capital equipment, excluding aircraft, increased 4.1 percent in November, the most in 10 months, according to data from the Commerce Department.
While the expiration of a tax credit at the end of last year may have influenced some of that buying, companies are set to continue their spending in 2014. Redmond, Washington-based Microsoft plans to more than double investment to $6.5 billion in the fiscal year that ends in June compared with two years ago, mostly on data centers and networking equipment.
A sharp increase in wealth has helped convince executives the expansion has momentum, said Vincent Reinhart, chief U.S. economist for Morgan Stanley in New York. Household net worth increased by $6.3 trillion in the first three quarters of 2013 to $77.3 trillion, thanks to rising equity and home prices.
Andrew Lapthorne, global head of quantitative strategy at Societe Generale SA in London, sounds a cautionary note. He sees less room than rivals for U.S. companies to spend because capital expenditures already have outpaced cash-flow growth for three years and, at about 7 percent of sales, are higher than before the financial crisis. Total debt also is 35 percent more than in 2008-2009.
“The problem is not a lack of desire to invest, but anemic demand reflected in very low sales growth,” he said in a Jan. 16 report to clients. “If the demand isn’t there, why invest?”
Almost a year after its recession ended -- and even as banks prove reluctant to lend -- Europe will enjoy a run-up in corporate investment, according to Erik Nielsen, chief global economist in London at UniCredit SpA.
A European Commission survey in November found that manufacturers plan to boost spending by 3 percent this year after cutting it that much in 2013. Volkswagen, Europe’s largest automaker, said that month it intends to invest 84.2 billion euros ($114 billion) through 2018 on developing new vehicles and upgrading factories.
“European companies have been sitting on their hands, waiting to see demand,” Nielsen said. “Capex during this year will kick start.” He anticipates economic growth of 1.5 percent in the euro area amid a 1.9 percent gain in fixed investment, which would be the most since 2007.
In Japan, the onus is on encouraging businesses to boost wages as inflation finally begins to take root in the world’s third largest economy.
“What we want is for wages to rise more than prices,” Prime Minister Shinzo Abe said last month in an interview. “We want to enter a virtuous cycle” where economic growth propels corporate profits, employers raise compensation and workers spend more, he said. Abe speaks in Davos on Jan. 22.
Although companies, including Nomura Holdings Inc. and Daiwa Securities Group Inc., say they will increase salaries for some workers, Bloomberg News surveys show that consumer prices in Japan still will climb five times faster than wage gains in the year starting April.
If corporations worldwide do beef up expenditures, it will boost the capacity of the global economy to expand in the longer-run, perhaps damping the concerns of Summers and others that industrial nations are stuck in a slow-growth trap.
In a sign that such pessimism may be misplaced, Emerson Electric Co. Chief Executive Officer David Farr said he’s going on offense this year to boost sales after reining in spending. Emerson, a St. Louis-based maker of compressors and automation equipment, estimates its global fixed investment will rise as much as 4 percent after increasing 1 percent in 2013.
After two and a half years of “keeping things really tight,” it’s time “to pivot and to increase our investments,” Farr said in a November conference call with analysts. “We believe the wind is starting to shift to our back.”