Sometimes a generally held truth changes over time and becomes less valid, or sometimes it can simply be false. According to Societe Generale’s Cross Asset Research, the general perception that businesses are not making capital investment today is simply wrong.
Cross Asset Research analysts Andrew Lapthorne and colleagues suggest that by historical standards capex spending is actually on the high side and should be considered “perfectly healthy.” The analysts suggest it is actually the huge amount of debt that corporations have taken on that leads to the misconception regarding current corporate capex spending, and that it is really massive corporate debt rather than reduced capex that is an issue of note.
Breaking down the capex numbers
Lapthorne makes his case by comparing current capex levels to 10-year historical average capex expenditures. “A breakdown of capex to sales on a company by company basis shows 45% of companies to have investment levels above 10 year averages. But the capex heavy sectors, such Utilities, Basic Materials and Energy see over half of companies spending more than they have historically. These sectors, coupled with the Industrials account for 65% of all capex. Hence the elevated aggregated capex to sales. In brief companies are indeed investing. The distraction meanwhile is the large cash piles hoarded by issuing record levels of debt.”
Health care and technology sectors are laggards
The analysts also point out that although the utilities, basic materials and energy sectors saw strong capex growth last year, both the health care and technology sectors saw relatively low capex growth. “Two sectors stand out as having lower levels of capex than history, Heath Care and technology. But in these sectors increasingly much of the manufacturing has been outsourced and overall capex has never been that high in the first place. Often new capacity and new ideas are bought in via M&A (biotech and tech start-ups for example) and manufacturing is outsourced to a third party (as is the case with Apple).”
The report concludes with a brief discussion of the current record high corporate debt levels. “What is unusual is the hoarding of cash. This cash is not being generated through depressed investment or indeed a lack of distribution to shareholders via dividends or buybacks. The cash is solely there because corporates are raising debt and taking full advantage of generous bond markets.”