Weak economics, strong equities
In 2012, the MSCI All-Country World Index of equities increased 16.9 per cent
S&P 500 Index increased 13 per cent
German , the DAX rose 29 per cent
French CAC40 rose 15 per cent.
India's Sensex Index increased 26 per cent.
Argentina's stock market grew 17 per cent
Profit margins and cash flows improve, perversely, in a period of low growth. Initially, companies cut costs, improving profitability. As revenues are stagnant, companies have no need to invest in expanding capacity or working capital, releasing cash flow. Reduction in depreciation charges and the ability to use cash flow to reduce debt reduces interest expenses. In the present cycle, sharp decreases in interest rates, though not necessarily interest margins, have also improved profit margins. Cost-cutting, productivity improvements and restructuring cannot be repeated endlessly.
The buildup of cash on corporate balance sheets is frequently cited as a sign of corporate health. In the U.S., since 2008, companies have been net lenders rather than borrowers and now hold around US$1 trillion in cash. Japanese companies hold liquid assets of US$2.8 trillion. European companies also hold large cash balances. Mark Carney, the newly appointed Bank of England governor, referred to the $300 billion of cash held by companies in his native Canada as "dead money."
The high cash balances reflect uncertainty about future financing conditions and the willingness of banks to lend. But it primarily reflects the lack of investment opportunities.
Changing demographics affect stocks. Investors approaching retirement may switch to more defensive assets and seek steady income, favouring bonds and cash. Low and declining returns over time have also undermined demand for equities. The reduction is evident in outflows from equity funds into other assets.