U.S. companies returned to hoarding cash with vigor in the second quarter as compared with the first, pressured in part by the uncertainty created by the U.K. vote to leave the European Union, known as Brexit, according to a new study.
The vote on Brexit, a sluggish domestic economy and a weak global economy combined to lead companies to hold on to their cash and defer investment decisions, according to the Association for Financial Professionals. The association’s Corporate Cash Indicators index (CCI) surged 9 points in the quarter to plus 8, a sign of a significant weakening in business confidence. On a year-over-year basis, the indicator rose 4 points to plus 14.
“Any likelihood of organizations deploying their cash has been curtailed with the outcome of the Brexit referendum, a tepid domestic economy and continued sluggishness in the global economy,” the association said in a statement.
The index measures recent and expected changes in corporate cash balances by calculating the percentage of survey respondents reporting an increase, or an expected increase, in cash holdings, minus the percentage reporting a decline, or an expected decline. When the index falls, it suggests companies are feeling more confident, while a rise suggests caution and pessimism.
When companies feel upbeat about the outlook, they are more likely to deploy their cash on mergers and acquisitions, or dividend payouts or share buybacks, while pessimistic companies tend to try to just hoard cash.
“The July CCI shows that corporates have stepped on the brakes amid growing economic and political uncertainty and are expecting to accumulate more cash in the quarter,” said Jim Kaitz, president and chief executive of the association. “Unless there is a clear opportunity, organizations will remain reluctant to deploy their cash.”
Finance chiefs are expecting the accelerated pace of cash retention to continue through the summer. The forward-looking indicator that measures expectations for changes in cash holdings in the third quarter has climbed to plus 16 from plus 7, the highest level since July 2011 and second highest reading since the association began tracking the data in January of that year.
Meanwhile, the CCI measure for short-term investment aggressiveness fell to minus 1 from plus 1 in the second quarter, suggesting a more conservative approach to investing.
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