Major corporations are sitting on a mountain of cash: a decadelong buildup was given another sharp lift by precautionary measures taken during the pandemic. Those balances are worth monitoring, because they have important implications for investment returns in the future.
Nonfinancial corporations in the euro area, Japan and the U.S. now sit on nearly $10 trillion of currency and deposits, about twice the level of a decade ago.
Those cash holdings are largest relative to the size of the economy in Japan—about 60% of GDP. In the eurozone, they make up more like 30%, and roughly 10% for the U.S.
But what they all have in common is that they have risen considerably, and not just due to last year’s extreme circumstances. Cash balances in each country were climbing for a decade before the pandemic began, defying repeated suggestions that they would be deployed for buybacks or investment. Corporate treasurers then went on a borrowing spree last year building up precautionary cash piles.
It’s worth looking to Japan to see what the consequences might be. Its cash buildup began in the 1990s, during the country’s famous lost decade. The cash mountain has weighed down returns on equity for shareholders, since companies are asset heavy and cash assets yield little to nothing.
The country’s large corporate cash balances are often eyed hungrily by analysts who wonder how the pile might be deployed. Sometimes, activist investors get their way: Japanese corporate governance has become markedly more shareholder friendly in recent years.
But the overall cash buildup still effectively means that companies have looked at the investment options available and found them wanting. When a company determines that sitting on near zero-yielding assets is the best use of their funds, it paints a very dim picture of their collective view of the economy’s future.
If the U.S. economy recovers rapidly, companies will hopefully instead decide that capital spending is a better use for funds. Buybacks and dividends will probably recover, but their considerable growth during the decade after the global financial crisis was not enough to prevent the accumulation of cash.
The U.S. cash buildup is not yet in Japan’s league, but the situation appears to be heading that way in Europe. Investors should keep a close eye on where overall levels settle: if they stay up here where the air is thin, that will be a dispiriting signal about the future.
Write to Mike Bird at [email protected]
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