Yesterday’s release of domestic capital expenditure (capex) figures were a sorry sight. In the three months to September, business investment fell a barely believable 9.2%. If you wish to read more on this, you can do so here.
Today, however, we’ll look at the rest of the world.
In light of plunging domestic spending, it’s a good opportunity to reflect on what’s happening to global capex. Like Australia, the world as a whole has something of an investment problem. And there’s no sign that things are likely to improve anytime soon.
Goldman Sachs has put together a handy image showing the extent of this investment slump. As you’ll see below, they’ve divided it by region, covering 2,500 stocks. Green represents high investment growth, whereas red indicates sharp decline. For everything in between, the following rule applies: the darker the colour, the steeper the decline.
Source: Goldman Sachs Global Investment Research
Lots of red and orange in that image, isn’t there?
Outside of the US, it appears as if the world has decided to forego investing altogether. Business spending is down by 6% in the US; over 20% in Europe; 15% in China and Japan. As for the rest of the world, Australia included, capex is down a whopping 28%.
Energy investment is freefalling across the world. And, outside of Japan, we can say the same about mining and metal investments.
In all, there’s very little optimism in that chart. Unfortunately, that’s not about to change. Goldman sees little to no upside to capex growth over the next few years. An accompanying statement reads:
‘Our long-held bearish view on capex hinges on several overlapping factors:
- The aftermath of China’s huge investment phase and the resultant overcapacity;
- Global growth becoming less capital-intensive;
- The ubiquity of technology (substituting hardware capex for software capex, digitisation of widgets, optimising utilising and rousing dormant capacity;
- Persistent uncertainty (around regulation, obsolescence risk and new competitors, both cross-border and cross-sector).’
Credit growth does little for capex growth
How do we account for this massive drop in global capex? After a decade of easy credit, you’d think the picture would look a little greener.
It’s not that firms aren’t borrowing — they are. It’s just that they’re not spending on growing their businesses. Instead, they’re lavishing investors with kickbacks. They use debt to fund share buybacks. And they spend whatever free cash flow they have to fund generous dividend yields.
What they’re not using it for is investment in growth. One assumes that’s the reason banks lend money in the first place…
So why aren’t businesses investing? Because there’s little upside for them. If returns on investment are unacceptable, businesses will hold back on spending. With global economic prospects cooling, finding adequate returns is proving difficult.
BHP Billiton [ASX:BHP] is a perfect example of everything wrong with capex. The miner won’t invest in new projects because of depressed commodity markets. But it still maintains the most progressive dividend yield on the ASX. And it’ll fight tooth and nail to protect that. If it doesn’t, its value among shareholders will diminish.
This morning JPMorgan predicted BHP would halve its dividend. But without its 8% yield, what value does BHP hold now? With no commodity rebound on the horizon, its dividend yield is BHP’s lifeline.
Nonetheless, BHP operates in the same world we all do. One in which growth prospects are ever harder to come by.
Aussie capex figures are depressing, no question. But the global capex malaise is even more demoralising.
Contributor, Markets and Money
The global capex collapse won’t come as any surprise to Markets and Money’s Greg Canavan. As one of Australia’s leading investment analysts, Greg’s warned all year that we’re sleepwalking into a recession.
His free report, ‘Australian Recession 2015: Unavoidable’, is timely in the wake of declining investments.
Falling mining revenues, business spending, and trade deficits already take their toll on the economy. Government revenues are down, and household debt is up. It’s a grim outlook, and one that’s likely to end in recession sooner rather than later.
But there is a silver lining in all this. You can take actions right now to protect yourself from the fallout of the coming recession.