Between mid-January and mid-February this year, UBS surveyed 600 large eurozone corporations about their investment intentions and the biggest risks that weigh on their capital expenditure plans.
With macro fundamentals improving in Europe and capital expenditure as a proportion of sales recently rising off 30-year lows, it is perhaps no surprise that political risk is now the biggest worry, not the economy.
We’re sorry, the Netherlands, no one was too anxious about your election; nor, perhaps surprisingly, are they about the forthcoming French and German votes. Far more concerning to European corporates – the biggest single worry for 27% of the sample – is uncertainty over the policies of the new US administration.
But one worry exceeds even fears over a protectionist, inconsistent, inexperienced populist in the White House and that is Brexit, an unhappy event that European corporations have brooded over for nine months since the UK vote last June and which is expected to be initiated on March 29 when prime minister Theresa May triggers article 50.
Reinhard Cluse, UBS
UBS economist Reinhard Cluse traces the familiar link between capital expenditure and corporate profitability at a time when analysts have begun consistently upgrading expectations for earnings across most European sectors. Equity investors, especially those based outside Europe, are now in wait-and-see mode.
After 11 months in a row of net selling, US investors have turned marginal net buyers of European equities, UBS finds when it dissects the exchange traded fund flows. But the scale of the reversal has been muted: $24.7 billion of net selling from February to November last year and then just $1 billion of net buying in the last three months.
How European corporations now adjust investment plans in response to Brexit matters a lot for European capital markets.
The good news is that 54% of corporations told UBS that Brexit will not change their investment plans at all. Less happily, 24% will cut investment ‘somewhat’. But only 8% will cut it ‘substantially’. So, that seems reasonably encouraging.
Oh, but there may be one small loser on the periphery.
Of the 600 companies responding to the survey, three quarters have operations in the UK. Of these, 31% said that they would remove a ‘large’ amount of capacity from the UK, with 10% saying they will pull all of their capacity. And this may happen fast: almost immediately, according to 17% of respondents, with another 32% cutting back within six to 12 months and most of the rest within two years. Bigger companies will act fastest, with those headquartered in France leading the exodus, followed by German and Spanish companies.
The pain will be localized; the benefits will be spread thinly. Companies say they will relocate the biggest share of that capacity within the eurozone, with other sizeable chunks going to central and eastern Europe or other EU countries outside the eurozone. A much smaller proportion may leave the EU entirely, heading for America or Asia.
Euromoney contacts one of our favourite ‘leave’-voting UK economists for a response. “No one pays any attention to surveys anymore,” comes the reply.
Forgive us if we do.