The much-anticipated “capex” boom? It’s already happening, and stocks don’t care
It’s a familiar narrative: companies will finally start investing the trillions of dollars of cash they’re sitting on, unleashing a capital expenditure boom that will drive the global economy and lift stock markets this year.
The problem is, it looks like an increasingly flawed narrative.
For a start, capital expenditure, or “capex”, has already been rising for years. True, the Great Recession ensured it took three years to regain its 2007 peak. But the notion companies are just sitting idly on their mounting cash piles is misplaced. As Citi’s equity strategists point out:.
“The death of global company capex has been much exaggerated.”
A new report from Citi shows that since 2010, global capex has risen 26% to $2.567 trillion. It’s never been higher:
As that chart shows, cash paid out through dividends and buybacks is also on the rise, up 40% over the same period to $1.394 trillion. So, buybacks and payouts to shareholders are soaring and capex has never been higher. This suggests limited scope for a capex-driven boost for markets, assuming capex provides such a great boost to stocks in the first place.
“We find little relationship between capex and market valuation. The global stock market currently values shareholder payouts more highly than capex.”
Essentially, record corporate profits (largely driven by keeping wages as low as possible) have funded firms’ increased capex and fueled a dividend and share buyback boom, particularly in the United States. Since 2000, U.S. capex has risen 110% to $693 billion. Share buybacks and dividend payments now outstrip capex, soaring 241% over the period to $700 billion.
A Reuters Investment Summit of leading asset managers in charge of more than $4 trillion late last year pinpointed an expected capex boom to be the single biggest factor behind a double-digit rally in U.S. and European stocks in 2014.
We’re only one quarter into the year, so it’s early days. But if stocks are to post double-digit gains this year, it’s unlikely to be on the back of a surge in capex.