Investors’ animal spirits spread to firms globally

Tags: News
Companies around the world are starting to share the exuberance that inspired investors last year.

As executives gather in Davos, Switzerland, this week for the World Economic Forum’s annual meeting, business confidence is rising, with a weekly gauge compiled by Moody’s Analytics at its highest level since the survey began in 2003.

Mergers and acquisitions are surging, with $130 billion in takeover offers already announced this year. And enterprises from Microsoft to Volkswagen are readying plans to step up capital spending after companies have squirreled away a record amount of cash to protect against a new financial crisis.

“The animal spirits are coming back,” said Mark Zandi, chief economist for New York-based Moody’s. “This is going to be a good year” for capital expenditures and hiring.

Behind the projected upturn: increased confidence in the durability of expansion following faster US and global growth late last year, the need to replace aging and out-of-date equipment, and a waning of what Zandi calls “existential fears”, including concerns about a breakup of the euro region.

A comeback is critical for the global economy and financial markets. Strategists at Goldman Sachs Group and Credit Suisse Group are forecasting the fastest worldwide growth since 2011 and continued gains for equities — predicated partly on optimism spreading from investors to companies.

The MSCI World Index is up 19 per cent from a year ago. Sales of high-yield, high-risk bonds set a record in 2013, and the average yield investors demand to hold bonds from Greece, Ireland, Italy, Portugal and Spain over benchmark German securities fell this month to the lowest since April 2010, Bank of America Merrill Lynch bond indices show.

“You’d have to say that values are more stretched than they were a year ago,” former US treasury secretary Lawrence Summers said. The Davos veteran warns major economies are threatened by “secular stagnation” that even zero-per cent interest rates can’t solve.

Since the collapse of Lehman Brothers in September 2008, the annual get-togethers of executives and government policymakers in Davos have been frequently dominated by a sense of dread about the stability of the world financial system. A global recession and doubts about the euro’s survival only augmented the stress.

While last year’s forum was calmer, it still was dogged by worries about Europe’s economic slump, a possible hardlanding for China’s economy, questions about Japanese stimulus plans and wrangling between US President Barack Obama and congressional Republicans over raising the federal debt limit.

“What is fresh is we are now in less of a crisis mood,” said Ernesto Zedillo, former president of Mexico and now a professor at Yale University in New Haven, Connecticut, who’s attending the forum. “People were extremely fearful a year ago. Now we seem to be in better shape but with significant fragilities.”

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