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Spending on capex, M&A loses favor with U.S. firms, UBS says

Feb 15. 2020
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By Syndication Washington Post, Bloomberg · Joanna Ossinger 

American executives set buybacks and dividends as their top priority for deploying capital around the turn of this year, and sharply curbed their expectations for capital spending, according to a survey from UBS Group.

Even with the U.S.-China phase-one trade deal in the offing, business investment "collapsed" as a priority, the UBS Evidence Lab survey of 450 senior executives about expectations for the coming 12 months showed. The percentage of firms seeing some acceleration in capital spending fell 15 percentage points compared with a June survey, while the proportion expecting some slowdown increased by 3 percentage points, the report said.

The survey was conducted in December through mid-January, before concerns erupted about the coronavirus. American nonresidential fixed investment already contracted for three straight quarters through December, hit by both the trade war and a slump in the development of fossil fuels.

Along with capex, mergers and acquisitions slumped to the lowest priority yet in UBS surveys that date back to 2017.

"There is a broad reallocation of funding from capex and M&A to buybacks/dividends, paying down debt/raising cash, and increased R&D budgets," UBS analysts including Keith Parker wrote in a note about the survey. "Small firms appear to be at the extreme end, with paying down debt/increasing cash the top priority, likely due to relatively higher leverage levels. Materials firms seem to be the exception with higher M&A expectations at the expense of paying down debt."

Sales and profit margin expectations have moderated from the June survey, with a notable dispersion among sectors. Projections in industrials were weakest "by far," while health-care companies showed "clear strength" with increases in their outlooks, UBS said.

In addition, profit outlooks for small firms weakened further, while improving for larger companies, which "points to earnings support for the S&P 500, particularly relative to the Russell 2000," the UBS strategists wrote.


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