Despite record profits and exceptionally high corporate cash
levels, capital spending by U.S. businesses remains subdued.
While companies clearly have the means to invest, they lack
the confidence in the face of a still nervous consumer and
uncertain end-user demand. In other words, low confidence and
an unusual amount of policy uncertainty
are likely impeding corporate spending. In addition, capital
spending has also been kept in check by the lackluster nature of
However, as I write in my recent Market Perspectives paper "
Sitting on Cash
," four interrelated reasons suggest capital spending may
marginally improve this year.
Improving consumer confidence.
Despite the government shutdown and unimpressive recovery in the
labor market, consumer confidence, while low, is improving.
During the back half of 2013, the Conference Board's measure of
consumer expectations averaged a little below 78, a material
improvement from the previous four years when this measure of
consumer sentiment averaged below 60. While today's levels are
still far below the long-term average, they are heading in the
Better economic growth.
the U.S. economy to grow by at least 2.5% this
, above last year's 2% rate. This should provide CEOs and CFOs
with greater conviction on end-user demand.
Normalization in real interest rates.
The improving economy is leading to a normalization in real
interest rates, which suggests higher rates of return on
investment. In fact, to the extent the macro environment
continues to improve and the Federal Reserve (Fed) exits its
quantitative easing (QE) program by year's end, I would expect
real long-term yields to continue to normalize, a development
that in the past has been associated with higher levels of
Companies have little choice.
While still relatively low by official estimates,
capital utilization rates
are probably overstating the amount of excess capacity, given the
rapidly aging nature of the capital stock. In short, we are
likely to see an increase in capital spending because in many
industries, there will be little choice.
Given the above trends, my baseline expectation for 2014 is
that capital spending continues to improve, a trend that was
already evident in the latter part of 2013.
So why does this matter for investors? To the extent there is
even a modest pickup in capital spending in 2014, this should
help support U.S. equity market valuations. In terms of specific
beneficiaries, I believe capital spending is likely to be led by
financial, telecom and service industries. This suggests that
technology stocks may be beneficiaries if capital spending begins
Source: BlackRock research
Russ Koesterich, CFA, is the Chief Investment Strategist for
BlackRock and iShares Chief Global Investment Strategist. He is a
regular contributor to
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