Much has been said about the tidal wave of cash currently sloshing
around on corporate balance sheets and the impact it could have on
markets when unleashed, but the long-standing question remains: what
will unlock it?
For Morgan Stanley, Mitt Romney is the key: it believes a victory for
the US Republican presidential candidate is a potential catalyst for an
economy-boosting corporate spending binge.
Could Romney prove to be the key?
‘To us, the biggest bull case for US equities is based on the huge
cash balances and the potential belief that they will be more actively
and productively deployed,’ said chief US equity strategist Adam Parker.
‘The biggest possibility here would be Romney winning the
presidential election. Our guess is that the market multiple would
expand if in fact more investors started believing Romney will win.’
But despite what investors believe will happen in November, the odds
are clearly against a Romney victory, with Barack Obama the bookies’
odds-on favourite.
And unlike Morgan Stanley, US market commentator Cullen Roche of
Pragmatic Capitalism believes it will ultimately make little difference
which candidate wins.
Closet Keynesian?
‘It’s an interesting observation,’ he says. ‘Romney’s a closet
Keynesian and much of his “balance budget” rhetoric could turn out to be
nothing more than election talk.
‘Plus, a continued Obama presidency is likely to run into further
stonewalling in Congress. Romney, the stock market friendly candidate?
Hard to imagine given the fact that Obama’s presidency has been
unusually friendly to the equity markets in his first term.’
The figures really underline the potential if either candidate can
persuade corporate America to loosen its purse strings. The level of
cash on corporate balance sheets has doubled over the past five years
and now stands well above $1 trillion, equivalent to between 11% and 12%
of total market capitalisation.
Andrew Milligan, head of global strategy at Standard Life
Investments, said: ‘The same phenomenon has been seen elsewhere though,
across Asia, Europe, Latin America and the UK. The counterpart, in many
cases, is low levels of debt – for example in the UK net debt/earnings
(excluding financials) has reached the lowest levels for eight years.’
Sector variation
Although the total figures are high, there is a massive disparity
between different sectors. In the UK this ranges from 27% for technology
and 19% for healthcare down to between 4% and 6% for energy, telecoms,
utilities and consumer discretionary companies.
Mergers and acquisitions activity has so far disappointed as clearly
firms are sitting back and waiting for tangible signs of a
sustained rise in economic activity, but there are some positives. Broad
capacity utilisation in the US is back up to 79%, close to its
long-term average while for some areas, such as machinery, it is as high
as 85%.
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