Companies Set to Invest Again, After 'Lost Decade' of Capex

 | Aug 01, 2017 | 8:14 AM EDT
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While HSBC (HSBC) shareholders are surely celebrating, I find the news that Europe's biggest bank will add $2.0 billion to its existing share buyback program, taking it to $5.5 billion in a year, profoundly depressing.

In fact, I find all share buybacks depressing: money that could be used to innovate and grow the business is instead spent on bolstering the share price, decreasing the share count and artificially boosting earnings per share. This kind of financial engineering sounds great for the short term. But it's not so great if you plan to invest in that business for the longer term.

This is why a report by S&P showing that capital spending has been increasing globally is really positive news, and investors should pay attention to it.

The corporate sector has suffered a "lost decade" in terms of capex, according to the rating agency's global corporate capital expenditure survey for 2017, released on Monday, July 31. This year's expected total global capital spending of $2.7 trillion will be less than 2007's $2.8 trillion. Still, 2017 is the first year when capex will grow, after contracting for four years.

The forecast rate of growth of around 5.5% is modest compared with the double-digit rates of advance seen in the mid-2000s, but those had a lot to do with investment in commodity-producing sectors in emerging markets, which have taken a hit in the years after the global financial crisis.

On the flip side, the fact that the current upturn does not rely on the commodity boom that underpinned the preceding rise in global capex means that it is more sustainable.

Some regions are set to take off after years of sluggishness. Japan and Western Europe are expected to see double-digit growth in capital spending, of 11% and 10%. Latin America's capex is set to grow by 9% this year. North America will see much more modest growth of 4%. Asia ex-Japan is expected to post even weaker growth of 3%.

Looking at sectors, only telecommunications is expected to see capital expenditures decline, and this is mostly because some major Chinese companies are undertaking significant cutbacks. The IT and consumer sectors are both expected to post double-digit increases, while utilities, energy, healthcare, industrials and materials are seen increasing at rates between 2% and 6%.

The most important sign of a "hugely important turning point" is the stabilization of commodity capex, according to the S&P report. Between 2013 and 2016, combined capex for the energy and materials sectors fell by 45% to $706 billion. In that period, the oil and gas and metals and mining sectors have shrunk annual capex in to levels close to what they were spending in 2005. Both are expected to see modest increases in capital spending in the current year.

Forecasts for capex for two-thirds of the biggest capital spenders have increased, the S&P survey shows. The biggest rise, of 23%, is seen for Samsung (SSNLF) , closely followed by Intel (INTC) with a 22% hike in forecasts.

Russian Rosneft (RNFTF) is third, with 20%, with Daimler (DDAIF) (17%) and Volkswagen (VLKAY) (14%) taking up the fourth and fifth places.

Forecasts have been cut for some companies, and there are a few U.S. giants among them. Action Alerts PLUS charity portfolio holdings Apple (AAPL) and Alphabet (GOOGL) have seen their capex forecasts cut by 7% and 2% respectively. Chevron's (CVX) were cut by 11%, General Motor's (GM) by 2% and Verizon's (VZ) by 1%.

Investors should look at capex trends and sectors to identify the companies that are likely to grow the fastest in the future. While share buybacks boost stock prices in the short run, in the long run innovation and investment are the best ingredients for share price growth.



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