Firms stash cash as outlook stays gloomy

published 30 August 2006

"Companies and institutional investors around the globe are holding record amounts of cash an indication that they are growing more pessimistic over the outlook for future economic and profits growth," says Joanna Chung in the FT. The world's 100 largest companies are holding a record $1.1trn of cash on their balance sheets, a near-threefold increase since 1990. Meanwhile, a net 33% of fund managers in Merrill Lynch's latest monthly survey were overweight in cash a new all-time record.

Certainly, the fund managers' caution means that they are worried about a downturn, agrees Dan Roberts, also in the FT. But there are other reasons why firms are hanging onto cash. One is that many are "running out of ideas". For example, a good chunk of the increase in cash is at oil and mining companies, whose investment choices are limited. In other sectors, firms are still cautious after the excesses of the last investment boom. Much of this excess cash is likely to be given back to investors. "It may be shifting the problem of excess cash back to investors, but better that than throwing it away on silly projects."

But there's another factor that should be borne in mind amid talk of cash surpluses, says Robert Cyran on Breakingviews.com. Sure, cash at FTSE 100 companies has nearly tripled since 1999, but net debt has nearly quadrupled. Firms have taken advantage of cheap debt to gear up and buy back stock. And when you're heavily geared, it's only sensible to have more spare cash on hand in case of an unforeseen cash crunch.