Cash hoarders are unlikely to ride to the rescue

January 24, 2014 7:46 pm

Cash hoarders are unlikely to ride to the rescue

By Brooke Masters

Consumers are not the only ones sitting on their hands at the moment. Research from Deloitte shows that the 963 non-financial groups in the Standard & Poor’s 1200 Global index have amassed a $2.8tn gross cash pile despite calls from politicians for corporate investment to stimulate economic growth.

But business executives do not appear to be rallying to the cause. In the US, where a growing economy might be expected to prompt increased investment, capital expenditure by non-financial companies in the S&P 500 index is forecast to rise just1.2 per cent in the 12 months to October, according to Factset, the data group.

Corporate leaders wandering around Davos for the World Economic Forum reinforced that view. Zhang Xian, chief executive of Soho China, a Chinese property developer, said of the Rmb11bn ($1.8bn) on its balance sheet: “I am simply sitting tight on the cash.”

In some cases groups may be being sensible. The cash is not evenly spread – the data show that 200 companies are holding $2.2tn, or 71 per cent of the cash. Many of the others, particularly in Europe, are highly indebted. The net cash pile for the broader group is nowhere near as out of whack with historical norms as the gross numbers.

For indebted companies, hiking capital expenditure just as interest rates look likely to rise may not be the best choice. And energy groups and miners are famous for overspending during boom times, only to see profits fall with prices and demand. Shareholders are rightly asking for caution from these sectors given the uncertainty in emerging markets.

But fund managers are growing irritated with the rest. A record 58 per cent of those who responded to a closely watched Bank of America Merrill Lynch survey released this week said they wanted more capex spending.

In some ways this looks like a failure of nerve. When Deloitte looked closely at the hoarders versus those who have been spending, it became clear that more experienced chief executives had been more willing to take a risk and spend. The chiefs of hoarding companies have been in post on average nearly three years less than their more active peers.

The researchers argue that leaders who successfully steered their companies through the downturn are more comfortable taking a risk on the nascent recovery.

Author and asset manager Andrew Smithers blames the caution on executive pay structures. Tying bonuses to share prices, or short-term return on equity, encourages executives to maximise current profits rather than investing for future growth, he says. If he is right, long-tenured chief executives may be more willing to spend because they have run out of easy ways to keep profits up and are worried about their legacies.

There is a further wrinkle. In the US just six tech companies hold a quarter of the big corporates’ cash, and that is unlikely to change soon. Companies such as Apple andGoogle are in high-margin, winner-takes-all businesses that generate enormous free cash flow, and their capital needs are generally low. It is hard to imagine them investing heavily in new plant or making acquisitions large enough to dent their growing cash piles.

Politicians who dream that the corporate sector will ride to the rescue and spur recovery are likely to be disappointed. If corporates do not spend more, governments may have to.