The Slowdown in Global Capex Spending: Looking for Silver Linings

There has been an overall slowdown in global capital expenditure (capex) spending. In the last few years, the capex boom has started losing its shine and is now moving towards a more conservative approach. 2018 and 2019 were tumultuous years for capex. Global corporate capex increased by only 2% in 2018 and 3% in 2019. S&P 500 projections for 2020 and 2021 point to a 1% decline in capital expenditure, a worrisome statistic for the global economy. Meanwhile, different industries are projecting completely different pictures of growth. For example, while the materials sector is fueling the market with 8% compound annual growth rate while IT is pulling at the market’s tail with a growth rate of -5%. It is evident from region-wise analysis that the global slowdown in capex is a result of negative growth in the APAC region (excluding Japan) and only 2.1% growth in North America. On the other hand, instead of following the global slowdown, Latin America has somehow recorded a positive growth rate of 22.8% year-over-year.

Volatility Is Not Good for Business: Key Reasons for the Global Capex Slowdown

A decline in global Capex can be timed with the high stock markets. It indicates that companies are finding it difficult to discover new areas of growth. Companies also appear to have taken a conservative approach in spending across categories as the future lies uncertain at the moment. Although major companies possess heavy liquid cash balances in their balance sheets, they remain uninterested in investing that cash in capex. Possible reasons for this reluctance include a fragile global banking system and firms wanting to have access to liquidity in a possible moment of crisis. Furthermore, companies appear to want to have cushions for potential disruptions in the wake of geopolitical concerns.

Investments in the form of research and development, share buybacks and higher shareholder returns prove to be catalysts in long-term growth for businesses. In volatile times, companies are preferring to invest in those avenues rather than capex. Other factors responsible for the global capex slowdown include the oil and gas capex cuts in the US, UK and APAC, political uncertainties such as Brexit and the decreasing dependence on physical products. A few other major issues include:

• US-China Trade War

Data shows that there is a decline in spending by Chinese companies, coinciding with the second round of tariffs issued from the world’s two major economies. This has resulted in companies limiting their spending. The trade war could be an opportunity for some economies, as many sectors are looking at India and South East Asia as favorable spots for investments in the near future.

• A Growth Slump in North America

U.S. corporate capex growth decreased from 11% in 2018 to 3% in 2019 as the effects from the 2017 tax cuts and JOBS Act as well as industry-specific factors in the U.S.

• Expected Shrinkage In Capex in APAC (excluding Japan)

A sharp decline (-12%) in capital expenditure in the IT sector, coupled with the decline (-10%) in healthcare capex is being reflected in the total capex growth across APAC, with the exception of Japan.

The best strategy to deal with the current uncertain environment is to hold your horses, sit tight on cash and leverage new growth opportunities when you are certain about the outcome. Striking the right balance between potential returns and ever-increasing risk is the key to beating the current state of global uncertainty.

Opportunities and Looking Ahead

The mini-boom observed between 2017 to 2019 is fading fast; evident from negative projected growth for 2020 and 2021. As of 2018, two regions — APAC (excl. Japan) and the US — hold a 64% share in global capex spending. Companies are spending this liquid cash for non-traditional purposes such as buybacks, dividends and research and development. The trade war between the United States and China could make India and Southeast Asia hotspots for capital investments. The strategy to beat an uncertain environment is to hold your position and wait for the right opportunity for spending. Firms need to take a balanced approach while managing their spending on new opportunities.

Sources

• https://www.spratings.com/documents/20184/1481001/Global+Corporate+Capex+Study+2019+Curbed+Enthusiasm/086812c1-e10f-e2e7-2be0-89c7e34d8bc7
• https://www.gfmag.com/magazine/september-2019/capex-collapse