Cash is increasingly king for UK FTSE listed companies

Research released today from Company Watch found that UK non-financial listed companies are saving more cash and are reluctant to spend or go into debt as the gloom and economic uncertainty almost everywhere continues.  They have a cash hoard of around £19 billion which in the face of what the banks took from the UK taxpayer may not seem much, but it is still a fair reflection of the lack of confidence that business has to spend and expand.  In Europe the figure is £110 billion.

Nick Hood, head of external affairs at Company Watch, said firms were choosing cash for security. 

He said: “All European economies are affected to some degree by the eurozone crisis and it looks as if the headlong growth of the Bric economies is faltering, so it’s hardly surprising that the bosses of our largest businesses view debt as dangerous and cash as comforting. 

“This scenario will concern politicians across Europe, but in particular in the UK, where only investment can generate the growth needed to re-balance economies and reduce deficits.” 

Given that many of the most debt laden companies on the FTSE had the rug pulled from under them as the banks ran for cover in 2008 (and are still running), it's hardly surprising that those businesses that may be fortunate to be flushed with cash have decided to keep it as their rainy day fund.  Business is also complaining that banks are now reluctant to lend to them anyway, although the banks deny this.  What is almost certainly true is that while the banks may be willing to lend it is going to be at a price, and the interest rate that business will be repaying, like that for the more general consumer, isn't going to be anywhere near the historically low BoE base rate which is almost an irrelevance for Mr and Mrs average unless you got a tracker mortgage prior to 2007 that is.

Then there is the news from the US that the uncertainty of the "fiscal cliff" and pending Presidential election could slow down further investment from business and see the US economy go back into (official) recession.

On Jan. 1, 2013, Bush-era tax cuts are set to expire, $1.2 trillion in automatic spending cuts begin - the price of Congress' failure to seal a long-term fiscal plan last year - and the U.S. debt ceiling will need to be raised again. Those and other scheduled measures will probably need to be dealt with in the lame duck session of Congress, after the election.

 Whatever the political outcome, some believe employers will show increased nervousness as the year advances. 

"Our view is that they will slow the pace of hiring and investment in the second half of this year, causing growth to slow down," Bank of America economists wrote in a June research note. They expect U.S. gross domestic product growth to slow to 1 percent by the fourth quarter due to a "major spike in uncertainty."

One area of US spending that may get cut, but will still be almost as much as the rest of the world put together, is defense.  UK listed companies Qinetiq and BAE Systems have managed to avoid the fallout so far, but both seem to expect the likelihood of difficult days ahead.

 “Defence markets remain challenging as the long cycle of high defence spending comes to an end and governments seek to reset budgets to deliver deficit reduction goals,” said QinetiQ. 

“In the US, visibility is limited with delays continuing in the award of both Department of Defence and federal civil business. This uncertainty is expected to continue at least until the outcome of the US presidential elections in November.”  

The warning here for investors is to be weary of any listed company that relies heavily on Government contracts, especially as the true extent of austerity cuts has not hit yet.

Sources;

Cash is king_The Scotsman

Fiscal Cliff

Qinetiq - Defence markets remain challenging