LONDON (Reuters) – Like households that put aside their savings during the lockdown, European businesses have also set aside precautionary cash reserves, and both could fuel the economic recovery if the pandemic ends early 2021.
These two potentially powerful forces have been reinforced by massive government and central bank support for jobs, incomes, credit markets and small businesses.
An increase in the savings of those working or paid but unable to travel, with fewer expenses and fearing for the future, saw the U.S. personal savings rate reach an all-time high of 33% of income in April, or more of $ 6 trillion in total.
A near-cut in the rate by July, to a still historically high level of 17%, has already fueled a rebound in the United States.
In Europe, the picture is very similar with a sharp increase in household deposits with banks.
Meanwhile, the other liquidity build-up occurred as companies scrambled to lock in near-zero borrowing rates and build up cash reserves to help them weather the pandemic, while reducing debt. dividend payments, redemptions and, in some cases, bonus payments.
The figures for Europe are obvious.
Bank of America’s European credit team estimates that investment grade non-financial companies in the euro area now have record levels of liquidity equivalent to 110% of last year’s profits, with the breakdown for French companies alone reaching 150 %.
And despite the ongoing pandemic, the pace of economic recovery, the reluctance of governments to return to nationwide lockdowns, and a huge global effort to develop a vaccine mean these cash levels may be excessive.
“Businesses in Europe may have ended up raising too much money – especially as politicians balk at a return to big lockdowns,” Bank of America wrote, adding that non-financiers have lifted more than half a trillion euros in liquidity in the bond and loan markets since March and French companies have raised liquidity equivalent to 9.3% of French gross domestic product.
This could bode well for corporate bond markets by minimizing net new issuance of debt for the remainder of the year, the Bank of America team said, adding that stocks could benefit as well, as pressure from shareholders to reduce “excess” liquidity could lead to a faster return of dividends, buyouts and mergers and acquisitions.
Not only did bond sales dry up over the summer to reflect the accumulation of liquidity, additional euro area bank lending to non-financial corporations in July slowed to just € 14 billion, from 122 billion euros in March.
HOOVER UP JUNK?
Believing that implicit corporate default rates on global high yield bonds were now too high, the world’s largest asset manager, BlackRock, on Tuesday advised to overweight high yield corporate debt and downgrade the rating. investment to neutral.
But what is the likelihood that the underlying rebound will continue from there? One of the more optimistic houses on the streets, Morgan Stanley, said this week that the global economy would actually return to pre-pandemic production levels sooner than it originally thought – d ‘here the fourth quarter of this year. The United States would return to it by mid-2021 – 4 quarters faster than it took to recoup lost production after the bank crash 12 years ago.
But given the uncertainty surrounding the pandemic, some investors believe that corporate caution may still be warranted.
Russell Silbertson, strategist at asset manager Ninety One, said companies could gradually start to rethink a mix of dividend hikes, bond and stock buybacks or even mergers and acquisitions, but the current period was in many ways “the point of maximum danger”.
Unlike normal, he said, asset managers are reasonably confident in the long term as the pandemic will eventually end, but the next 2-3 months are a guess.
“The time horizon is back to the fore,” he said.
The twist of Bank of America’s research is that it shows that aggregate cash levels mask huge variations between large and small businesses – making a strong case for keeping government supports in place until the start of the year. ‘next year.
“The reality is that there are a lot of ‘inequalities’ in access to finance,” wrote Bank of America. “Herein lies the challenge for governments as state-backed loan programs begin to expire: ending them could take away precisely the crutch that small businesses have been counting on. “
The author is editor-in-chief for finance and markets at Reuters News. All opinions expressed here are hers.
By Mike Dolan, Twitter: @reutersMikeD; Editing by Alexander Smith