A mountain of cash

13 June 2012

Standard Life Investments, the global investment manager, highlights that, in recent years, the corporate sector has built up historically high levels of cash on its balance sheet. In the latest edition of Global Perspectives the leading investment house examines how and why this phenomenon has occurred, identifying triggers which might encourage businesses to put cash to work, resulting in a more sustainable business cycle.

The report also considers the changes in corporate behaviour and banking relationships, possibly long lasting, which could encourage firms to hold onto higher levels of cash than in the past.

Andrew Milligan, Head of Global Strategy, Standard Life Investments said:

"Prior to the financial crisis, there was pressure on companies to have as efficient a balance sheet as possible. In recent years, firms have dramatically rebuilt their cash holdings through restraining such areas as capital spending, dividend payments, share buybacks or M&A. Looking ahead, it is hard to see a sustained revival in any of the major economies unless companies start actively to put cash to work.

"We do expect it to be put to work, more so in the Americas and Asia where growth prospects are positive, but less so in regions such as Europe where political and regulatory uncertainty is higher. Some of the triggers will be cyclical; as capacity utilisation builds up so will investment, albeit not always in the home country but sometimes closer to the final consumer. Some of the obstacles are deeper seated, existing until the banking sector is readier to provide funding and when memories of the ‘credit crunch’ fade from corporate memories.

"All in all, a recovery in business confidence and cash usage should tie in with a more optimistic outlook for corporate earnings, leading to a virtuous circle with a rise in stock market valuations. Ultimately, whether or not businesses lengthen or shorten their time horizons will be key in determining how the mountain of cash which businesses are generating will be used."