U.S. companies once again returned to hoarding cash amid mounting economic and geopolitical fears in a possible omen of a business-investment pullback, a new study warns.
The U.K.'s Brexit vote, a sluggish U.S. economy and a weak global economy combined to lead companies to delay investment decisions and just sock away their cash, the Association for Financial Professionals said in a new report.
The association’s Corporate Cash Indicators index (CCI) surged 9 points in the quarter to plus 8, a sign of a significant weakening in business confidence. On a year-over-year basis, the indicator rose 4 points to plus 14.
The index measures recent and expected changes in corporate cash balances by calculating the percentage of survey respondents reporting an increase, or an expected increase, in cash holdings, minus the percentage reporting a decline, or an expected decline. When the index falls, it suggests companies are feeling more confident, while a rise suggests caution and pessimism, MarketWatch explains.
The data, which the Financial Times said could be a harbinger of a pullback in business investment, was released as U.S. companies issue cautious and pessimistic third-quarter earnings outlooks.
“Any likelihood of organizations deploying their cash has been curtailed by the outcome of the Brexit referendum, a tepid domestic economy and continued sluggishness in the global economy,” said Craig Martin, Corporate Treasurers Council executive director, said in a statement.
Martin said business confidence had been subdued through the recovery from the financial crisis. Capital investment and hiring by U.S. multinationals had been held back further this year by swings in currency markets.
“Even companies with the most sophisticated currency hedges are finding this one more complicating factor,” he said.
To be sure, when companies feel upbeat about the outlook, they are more likely to deploy their cash on mergers and acquisitions, or dividend payouts or share buybacks, while pessimistic companies tend to try to just hoard cash, MarketWatch explained.
“The July CCI shows that corporates have stepped on the brakes amid growing economic and political uncertainty and are expecting to accumulate more cash in the quarter,” Jim Kaitz, president and chief executive of the association, told MarketWatch. “Unless there is a clear opportunity, organizations will remain reluctant to deploy their cash.”
Meanwhile, other experts are painting a gloomy forecast for investors as well.
For its part, BlackRock Inc. warns that it is going to be really hard for any asset class to give investors returns above a mere 6 percent in the coming years, Bloomberg News reported. In fact, according to BlackRock Inc.'s Global Chief Investment Strategist Richard Turnill, most won't even scrape 5 percent.
"Our five-year return assumptions have steadily moved lower since the financial crisis, amid weak global growth prospects, easy monetary policy and rising valuations," he writes. "We have lowered our assumed returns for most fixed income assets, following a drop in yields (and rise in valuations) in the second quarter."
(Newsmax wire services contributed to this report).
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