Capital spending by non-financial companies to hit $920bn amid economic recovery

Capital spending by non-financial companies in Europe, the Middle East and Africa is expected to increase to $920 billion in the 12 months to June this year, according to Moody’s Investors Service.

This will be driven by an increase in investments linked to the coronavirus-induced shift to online sales and remote working.

Capital expenditure by Moody’s rated non-financial corporate entities in the region is estimated to be about $150bn higher than its forecast for the same period in 2020, the rating agency said in a report on Tuesday.

"The utilities, telecoms and energy sectors will dominate capital spending, accounting for half the total – but nearly all sectors are contributing to the overall increase," said Richard Morawetz, a vice president and senior credit officer at Moody's.

"Stronger earnings and accumulated cash balances provide rated companies with the firepower to increase spending."

Companies covered by Moody’s hold about $400bn more cash than they did before the pandemic. However, they also accumulated more debt during the early stages of the outbreak.

Corporations, government-related entities and sovereigns all tapped into debt markets in 2020, taking advantage of historically low interest rates and abundant liquidity as they looked to shore up their capital bases amid the uncertainty caused by Covid-19.

The global economy, which fell into its deepest recession in 2020, has made a strong recovery and businesses are now looking to use the cash on their balance sheets.

Some companies will seek to repay debt or increase shareholder returns, with capital spending one of several priorities competing for the use of cash, Moody’s said.

“Even as capital spending rises, we forecast stronger free cash flow in most sectors, underpinned by stronger earnings,” the rating agency said.

The shift to online sales and remote working, as well as government targets to increase 5G broadband penetration and connectivity are factors that are influencing investment spending in retail, telecoms and other sectors.

Companies that were hardest hit by the coronavirus pandemic often cut capital spending as a defensive measure. However, spending is expected to bounce back as the economy recovers.

In sectors such as transport, services and retail, capital spending will pick up but remain "vulnerable to the pace of recovery".

"We forecast the companies we rate in the utilities and energy sectors to invest close to $200bn [in] each [sector] or about $30bn more on average than in the previous year," Moody's said.

"Half of total capital spending is by 45 mostly investment-grade companies."

The oil and gas sector is benefiting from increased operating cash flow owing to higher crude prices but only a portion of this will be used to raise capital spending as many companies focus on strengthening their balance sheets and improving shareholder returns.

"Upstream oil companies already have the dilemma of whether to invest to meet future demand for oil while facing the prospect of oversupply and stranded assets as governments introduce regulations to reduce carbon emissions," according to the Moody's report.

Global oil and gas companies will need to invest $650bn a year on average between 2021 and 2030 under the International Energy Agency's stated policies scenario.

They would need $500bn under the agency's sustainable development scenario, where demand for oil begins to ease sooner. However, oil and gas companies have not met either of these targets for several years, Moody's said, citing data from the agency.

Environmental, social and governance considerations are also playing an increasing part in the spending decisions of non-financial companies, especially in sectors such as utilities, oil and gas, automotive, metals and mining, chemicals, transport and property.

“A more demanding regulatory environment and increased investor scrutiny are accelerating this change in focus,” Moody’s said.

Countries’ own emissions targets may also result in more regulations and companies could face "higher borrowing costs or reduced access to funding in coming years if investors believe they are not adhering to emissions targets", the report said.