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Current
economic growth forecasts from the Bank of Canada are based on a 4%
increase in the capex growth rate. This forecast could prove to be
optimistic as the growth rate in capex since 2008 has only averaged 1
percent annually. However, according to most economists, capex must
increase by 8% annually in order to just replace the level of capital
that is worn-out through wear and tear. The Bank of Canada has
estimated that if businesses were to just replace the capital stock of
the Canadian economy by this much each year, the Canadian economy could
assume a growth rate closer to 3 percent. This level of GDP growth
would begin to fuel better wage growth and lower unemployment.

 
As the chart above shows, Canadian capex is heavily influenced by
commodity prices. Given this historical relationship, Canada’s economy
will have to wait for a global upturn in commodity prices before a
sustainable increase in capex is in place.

Former
Bank of Canada governor Mark Carney was one of the most vocal critics
of corporations for choosing to allow their cash balances to build up
to what he deemed to be excessive levels. Carney stated in a speech in
August 2012 that “Cash holdings relative to assets have doubled over
the course of the last decade. Doubled. So, at some point – companies
will make these judgements, shareholders would make those judgements,
managements will make these judgements – those cash balances could
become excessive”. Carney made it clear that if corporations could not
decide what to do with their cash, then shareholders should be paid the
cash and they would be able to spend the money.

US corporations have also come under criticism.  Corporate
cash
balances are approaching $5 trillion while capital expenditures are not
keeping up to basic maintenance levels. Recent data shows that US capex
is running at the lowest level in over 40 years and the age of the US
capital stock is at a record high. In the short term, this is obviously
a negative. From a longer term perspective, the fact that the US
capital stock is starved for investment means that at some point there
is going to be a significant upgrade cycle.

In
their defense, corporations have stated that their cash reserves are at
record levels because they are running their businesses with record
efficiency and maintaining profit margins that allow them to grow
profits even in a slow economic growth environment. The usual answer
from CEOs is that they are waiting for more certainty before they
embark on an extensive deployment of their cash for capital
expenditures. Their anxiety stems from a number of factors. One is that
during the financial crisis, many corporations were faced with a
liquidity problem in which they could not access credit. Memories seem
to be long from that period and corporations want a high level of
visibility around the economy before they commit to spending.

This line of thinking has been met with criticism. Jaime Dimon, CEO of
US banking giant JP Morgan, has stated that CEOs who are holding back
from further investments in their businesses should stop looking for
certainty because it has never existed. In a shareholder’s letter,
Dimon states ‘’It
seems that just about everyone has become a risk expert and see risk
behind every rock. They don’t want to miss it – like they did in 2008.
They want to be able to say, ‘’I told you so.’’ And, therefore, they
identify everything as risky’’. 

Corporations are also nervously guarding their credit ratings. In the
aftermath of the financial crisis, many pointed fingers at the credit
ratings agencies. They were accused of being too lax in handing out AAA
credit ratings which often resulted in investors buying investments
that proved to be riskier than they thought they would be. To put this
in perspective, in 1993 there were over 400 AAA rated bond issuers.
Last year, there were only 147. This is despite the fact that interest
rates are at generational lows, debt to cash levels are low by just
about any standard and debt servicing costs are so low that they are
helping to prop up profit margins in an era where few corporations
maintain pricing power in the face of a strong competitive environment.

But
management is also likely swayed by another factor: shareholder demands
for a return of cash through dividends and stock buybacks. 
Recent years have seen greater than usual activity levels from activist
investors. These are investors who buy up large stakes in a target
company and use this to influence corporations to make changes that
will boost the stock price.

Armed with capital that is low cost and plentiful, activists are able
to take aim at companies once thought to be out of reach due to their
sheer size and  ability to fend off attacks. Activist
investing used to be seen as a less reputable type of investing
but  more recently pension plans have teamed up with activists
to effect change.

Activist investors have both fans and detractors. Their supporters say
that they are able to wake up sleepy CEOs and interrupt the sometimes
overly cozy relationship a board of directors has with the executives
of a corporation. As Warren Buffett recently stated, corporate boards
are “in part business organizations and in part social organizations.”

On the other hand , the critics of activists say that too often the
activist shareholder is only interested in a short term boost to the
stock price—with little or no thought towards the long term interests
of the corporation. The stigma from the practices of the corporate
raiders of the 1980s is still fresh in the minds of many. Many
companies were weakened whereby companies had to choose between paying
off the corporate raider and making long term investments for the
benefit of the company. In reality, there are some activist
shareholders whose actions do result in long term benefits to the
corporation and its shareholders. They help to maximize value for the
long term benefit of all of the stakeholders in the company.

Retail investors have also shown a strong level of influence on
corporations. Due to low interest rates, investors are seeking income
from equities through dividends. As a result, many dividend paying
companies have been rewarded with premium valuations– even though many
of them might be slow growth companies.