At the beginning of the Covid-19 pandemic, companies put investment plans on hold and drew down credit lines to weather the upcoming storm. Back in June, they were sitting on about $2.5tn in cash — the largest amount analysts at Standard & Poor’s had ever seen. And even if they do not have any cash left, they can easily source fresh capital. Central banks are keeping interest rates at historic lows, and yield-hungry investors are writing blank cheques for almost anyone raising funds in the market.
Despite some warnings, the ‘everything bubble’ is inflating by the day, with prices going up across the board. The global economy is awash with cash.
Cash does not necessarily lead to investment — in the end, companies chase profits and the macroeconomic cycle is the ultimate proxy of their expectations. From this perspective, things start looking promising. The IMF expects the global economy to rebound stronger than initially thought, and grow at the fastest pace since the 1970s, increasing by 6% this year. With these figures in mind, chief financial officers are looking ahead with renewed optimism.
Take US car producers, for example. They are bumping up capital expenditure (capex) by almost 50% this year, compared with 2020's, taking it well above pre-pandemic levels, Citi Research figures show. Once again it is time for US companies in hotels, restaurants and leisure businesses to invest, and they are planning to spend 40% more than last year, although in their case capex is still shy of pre-pandemic levels.
The cycle out of Covid-19 is well advanced in the US, with the IMF expecting the country’s gross domestic product (GDP) to bounce back to pre-Covid-19 levels this year. China has done even better, as its GDP fully recovered in the second half of 2020. Elsewhere, however, it is a whole different ball game.
Recovery will be patchy and bumpy for many, and will ultimately depend on the degree of success of local vaccination campaigns. As I write this column, Covid-19 deaths in Brazil are running at a record high of about 4000 per day; in the UK they are nearing the low tens.
Inevitably, the investment cycle will also follow the outline of this ensuing K-shaped recovery. Investors, particularly foreign investors, will chase opportunities in markets that are springing back to life, while keeping a low profile elsewhere. The protectionist policies around trade and investment that have flourished during the pandemic add to the mix, and the divide between developed and developing countries is again widening.
Those same US companies that are deploying cash to build a new capex cycle, which traditionally are the world’s biggest source of cross-border investment, seem to have taken a more regional, if not like-to-like, approach to overseas investment. Some seven of 10 FDI projects they have announced since the beginning of the pandemic went to OECD countries, fDi Markets figures show. European investors are behaving similarly.
Global growth, combined with low cost of capital, is indeed shaping a new investment cycle. Hardly, though, foreign investment will signal a new wave of globalisation this time around. More likely, it will strengthen ties within major economic blocs in North America, Europe and Asia-Pacific. The 'Triad' is back, and is here to stay.
This article first appeared in the April/May print edition of fDi Intelligence. View a digital edition of the magazine here.