Spend and Trade

Story Highlights:

• In recent days, some positive developments have gone largely unnoticed.
• Firms are starting to deploy cash, spending more on business expansion.
• Global trade is getting freer—China signed new FTAs with Germany and the UK.
• The US also made some long-awaited FTA progress, clearing some hurdles in the way of congressional votes on deals with South Korea, Colombia and Panama.

This year has had no shortage of negative news stories (whether material to capital markets or not). But that’s always the case—no year is ever pristine and free from worry. What matters is how well negatives balance (or don’t) against positives—and how detached sentiment is from that reality.

And positive fundamentals do exist, though they seemingly get short shrift—like US business investment, which should continue to rise as firms deploy the cash they’ve stockpiled in recent years. As of Q1 2011, S&P 500 companies had a record $1.1 trillion in cash, and many firms now plan to increase spending—and in a sign of fading corporate risk aversion, the spending isn’t to pay down debt. Instead, it seems growth-oriented: Companies are financing research and development, business expansion, M&A and higher production. They’re also buying back stock, which should lower share supply and can provide a tailwind for prices. Business growth has been responsible for a major chunk of this expansion thus far, and more investment—especially as balance sheets remain cash-rich thanks to rising profits—suggests there’s plenty of fuel left.

Economic activity should also get a lift abroad as China inked two European trade deals during Premier Wen Jiabao’s recent sojourn. The larger, with Germany, could boost bilateral trade from last year’s €130 billion to between €200 billion and €260 billion annually by 2016—this following those nations’ 34% trade increase since 2009. The second deal, with the UK, was substantially smaller at £1.4 billion. But there’s no free trade agreement too small—even small FTAs can open the door for higher total trade over time. This seems the case with China and the UK as both nations signaled their desire to increase trade in the future. As China grows, it provides an ever-bigger end market for developed countries, and Germany and the UK look poised to benefit. Though there’s ample opportunity for the rest of the world to participate as trade gets freer globally.

That’s one reason we’ve long said the US needs to catch the FTA fever, but as other countries remove barriers, our deals with South Korea, Colombia and Panama have been stalled for years. Yet Congress overcame key hurdles on Wednesday. The biggest was the Trade Adjustment Assistance program, which Democrats said was requisite for any trade deal—Congress agreed in principle on renewal, which will likely be part of the South Korean legislation. The Colombian deal also seems ironed out, with sources saying it will include provisions extending favorable tariffs on certain South American goods. Overall, Wednesday’s progress seems to clear the way for final votes on all deals before the August recess—long overdue, though better late than never. Freer trade will give the US more access to growing markets, which should further boost growth. Combine that with increasing business spending (in the US, but globally too), and those are some incremental positives that remain underappreciated.