A recent Fidelity Worldwide Investment survey of CEOs of global companies found they are most concerned about government intervention and intrusive regulation; moreso than inflation, wage costs, pricing issues or even their own balance sheets.
Government interference in the free market for goods and services is running higher than usual now due to governments’ new religion of balancing budgets, according our latest survey of thousands of CEOs around the globe.
“Corporates see how governments, such as China’s, are increasing their tendency to micro manage business in order to achieve macro goals, particularly in the banking, property and environmental areas,” says James Walker, Investment Commentator at Fidelity Worldwide Investment.
“Despite this, it is clear that if we can get some strong leadership from politicians and more confidence that the sovereign debt crisis in Europe can be brought under control, the corporate world is in good shape to fuel an economic recovery.
Corporate balance sheets healthier
Mr Walker notes “the balance sheets of both Asian and European companies are considerably healthier than in 2008/09, indicating that important lessons were learnt in the last financial crisis.
“However, while there have been significant improvements in corporate balance sheets, this hasn’t filled corporate leaders with confidence – they are keeping their hands in their pockets. CEOs are reluctant to spend their cash-flows as political and economic uncertainty continues. Cash-rich companies in Asia ex-Japan alone are sitting on around US$1 trillion in cash. Most of this seems to be going the way of dividends – cash payout ratios are set to increase from 12% in 1998 to 32% next year.
“In contrast, most global corporates are planning on reducing or keeping constant their capital expenditure [71%].
“In Europe, 21% of companies are looking to increase their capex by 10% or more in the coming year compared with last year, with 5% of companies looking to increase their spend by over 20%. European companies are also likely to increase their spending on information technology infrastructure to a greater degree than in Asia.
“In Asia Pacific, Fidelity’s analysts believe that 32% of companies are looking to increase their capex by 10% or more in the coming year compared with last year, with 9% looking to increase their spend by over 20%. In Europe, only 21% of companies are looking to increase their capex by 10% or more in the coming year compared with last year, with 5% of companies looking to increase their spend by over 20%.
“A dose of corporate Prozac, as well as clearer outcomes from governments, are required to kick-start the corporate spending which could help spark a global economic recovery,” says Mr Walker.
Gap in the ‘two-speed global economy’ likely to widen
“There is already a two-speed global economy,” he said “with the more positive growth expectations in Asia compared with Europe are likely to become a self-perpetuating fact that will further stimulate Asian economies.
“The survey suggests that Asian companies should be better protected against economic woes in the western world as Asian exposure to the US and Europe is much lower. Only 36% of Asian companies are reliant on the health of the US compared with 69% of European companies, and only 25% of Asian companies are reliant on the health of core Europe compared with 88% of European companies.
“The two-speed world is likely to continue, though Asia will only gradually decouple from the US and Europe as capital flows become less controlled and more efficient.”
Asia seen as a key end market rather than cheap manufacturing alternative
Mr Walker also notes “Asia is gradually evolving from a cost centre to a profit centre in the eyes of global corporates. Of these, China was overwhelmingly selected as the major source of that growth. ‘Other Asia’ was the next most popular source of growth [11%], followed by Latin America [8%] and then the core Eurozone [5%]. Perhaps surprisingly, India only registered with 4% of companies as the one major source of future growth.
“Asia is still thought to be a major source of growth because even a hard landing in China is better than the best case scenario in the West, China’s economy is migrating from one driven by capital formation to one driven by consumption. This change will take time, but explains why companies are now looking at Asia, and China in particular, as a new consumer base rather than a place to shift operations to cut costs.”
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