[Global Corporate Investment Red Hot ②] Increasing Investment to Prepare for Consumer Explosion... Korea Hesitates

[Asia Economy Reporter Park Byung-hee] The investment boom by global companies presents both opportunities and threats to Korean companies. When global demand and investment explode, it can act as a boon for the Korean economy, which has a high export ratio. On the other hand, domestic companies, which must compete fiercely for survival in the global market, cannot afford to be complacent. To seize the post-pandemic market, Korean companies must actively respond to these challenges. However, the domestic environment is causing companies to hesitate.

US S&P500 Companies Announce Large-Scale Investments

Global companies are rapidly increasing investments this year due to expectations of explosive future consumption. Credit rating agency Moody's stated in April that the increased savings worldwide since COVID-19 amount to $5.4 trillion, and predicted that consumption could explode once COVID-19 containment measures are eased.

On Wall Street, there is a consensus that corporate investment outlooks have never been this optimistic. Bank of America (BOA) analyzed the remarks of management regarding capital expenditure plans when companies included in the US Standard & Poor's (S&P) 500 index announced quarterly earnings. BOA's analysis of remarks since 2006 concluded that management has never shown such strong confidence in capital expenditures as they have this year.

In this context, the British economic weekly The Economist explained that expectations for capital expenditure by 25 non-financial S&P500 companies have risen by about 10% over the past year. Companies in the S&P500 account for one-seventh of global corporate capital expenditure. Their capital spending serves as a benchmark for global capital expenditure.

Consulting firm Oxford Economics recently forecasted in a report that corporate capital expenditure will show a strong recovery this year due to a surge in demand for capital goods. Market research firm IHS Markit expects global real fixed asset investment to increase by more than 6%.

Korean Companies Cutting Back on Investment

Corporate investment is expected to increase mainly among information technology (IT) and consumer goods companies. This is because new demand based on untact (contactless) methods was created due to COVID-19. Increased demand for new IT equipment and software suitable for remote work is a clear example.

According to The Economist's own analysis, IT companies' capital expenditure is expected to increase by 42% this year compared to 2019, before COVID-19. Apple plans to invest $430 billion (approximately 476 trillion KRW) in the US over the next four years, increasing its investment scale by 20% compared to previous plans. Taiwan's TSMC, the world's largest semiconductor manufacturer, announced plans to invest $100 billion (approximately 111 trillion KRW) over the next three years. Analysts expect Samsung Electronics to increase capital expenditure by 13% this year following a 45% increase last year.

Global consumer goods companies' capital expenditure in the first quarter of this year also surged by 36% compared to the same period last year. Retailers such as Target and Walmart are expanding investments as online consumption increases.

Accordingly, there are calls for domestic companies to hurry and increase investments. This is because domestic companies' responses may be delayed amid signs of an explosion in global corporate investment.

In fact, a recent analysis by the Korea Economic Research Institute of the investment plans of the top 500 companies this year found that 58% of major companies have either not yet prepared investment plans or plan to reduce them. This is why there are calls for active support and deregulation in areas with clear growth prospects such as semiconductors.

Corporate Fundraising Also at Record High

Competition among companies to secure funds to avoid missing investment opportunities is also fierce. Although the momentum has recently slowed, the initial public offering (IPO) market based on special purpose acquisition companies (SPACs) is experiencing a record boom this year.

Corporate bond issuance is also active. Thanks to central banks' economic stimulus policies, companies can attract funds at low interest rates. The issuance volume of bonds by investment-grade US companies this year is $1.7 trillion, a record high. This is a significant increase compared to $1.1 trillion in 2019, before the COVID-19 pandemic.

The issuance volume of convertible bonds (CBs) is also at record levels. According to Dealogic, as of the 26th of last month, 97 US companies have issued $54.3 billion worth of CBs this year. The issuance amount increased by 11% compared to the same period last year, reaching an all-time high. Since CBs provide premium profits only if stock prices rise, this indicates investors' optimistic outlook on future corporate stock prices and the economy. The Wall Street Journal (WSJ) analyzed, "Last year, companies issued CBs to prepare for shocks caused by COVID-19, but this year, they are issuing CBs expecting opportunities such as mergers and acquisitions, investments, and share buybacks."

This content was produced with the assistance of AI translation services.