Survey results track analyst capex forecasts
Feeling the pulse of Eurozone corporates during the COVID-19 lockdown
The latest UBS Evidence Lab survey of 540 Eurozone firms in Germany, France, Italy and Spain, conducted between 24 April and 18 May, provides insight into how Eurozone firms changed their investment, financing and hiring plans during the lockdown. The net balance of firms planning to increase investment fell sharply to -7% from +44% in the Q1 survey (before the lockdown), as the share of firms planning to step up investment fell from 56% to 32%, while the share of those planning reductions rose from 12% to 39%. The declines were particularly sharp in Spain and France, but less so in Germany and – surprisingly – in Italy. Large firms scaled back their investment plans less than small and mid-sized enterprises (SMEs) and capex intentions in industrial firms held up better than in consumers and materials. Corporate finance, traditionally dominated by retained earnings, seems to have shifted a bit more towards external financing sources, such as bank credit and equity/debt issuance. The net balance of employment intentions fell sharply to -20% from +31 in Q1, with particularly large reductions in Spain and Italy. Corporate wage expectations fell sharply, particularly in Spain. The new survey is consistent with the expectation that after a very weak Q1, Eurozone activity in Q2 will be a lot worse.
What is boosting investment and what is holding it back?
Shifts in technology is the most important driver for capex given the structural need for companies to invest, in part to offset competition. Since February, shortages of labour, Brexit and commodity prices are seen as less of a drag on investment intentions. Perhaps surprisingly, trade wars are seen as a net positive for capex and may be part of a broader process of on/near-shoring of supply chains post Coronavirus. We map the survey data against UBS analysts' capex forecasts.
Investment themes: Look to public fiscal spending, not private sector capex
Capex is unlikely to be a strong theme for equity investors this year. Instead, we would focus on public sector fiscal spending: last week's German package pushes Germany to one of the largest fiscal expansion programs as a percentage of GDP.