Here’s 3 Reasons to Be Bullish on Corporates
U.S. and European companies are emerging from their post-crisis "hibernation" and re-focusing on growth, said U.K. bank HSBC, whose analysts forecast the awakening will be positive for stock markets.
As markets remain focused on first-quarter earnings, HSBC strategists Daniel Grosvenor and Garry Evans highlighted three signs of increasing corporate optimism, which could be a cue for positive equity performance.
"Companies have been in hibernation since the financial crisis. They have built up precautionary cash holdings, paid down debt and have been reluctant to invest. But we are beginning to see signs that these trends are reversing," said Grosvenor and Evans in a research note on Wednesday.
The strategists noted that non-financial corporates are starting to re-leverage, hold less cash and spend more in capital expenditure (capex), suggesting an increased focus on growth.
According to HSBC, capex as a percentage of cash-from-operations rose for the second year running in 2012, and is now at levels last reached in the early 2000s. Capex also increased in Europe, where it is back to pre-crisis levels.
"We find that companies are beginning to spend more on capex and are financing this expenditure by reducing cash and raising new capital through debt. We regard this as an encouraging sign as we saw similar trends in 1994 and 2004. In both instances, it signaled the start of a multi-year capex cycle that coincided with robust top-line growth and strong equity performance," wrote Grosvenor and Evans.
Meanwhile, companies are re-leveraging. "This is most marked in the U.S., where we find companies are also continuing to buy back shares. Indeed, there have been a number of companies in the U.S. looking to issue debt to directly finance share repurchases," said Grosvenor and Evans.
(Read More: Buybacks or Dividends – Which is Better for You?)
"On its own this could be a worrying sign as it would suggest companies see no better use for the borrowed money. However, as capex is also growing, it more likely indicates that chief financial officers believe their equity is undervalued," they added.
--By CNBC's Katy Barnato