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L&G predicts corporate expenditure will drive growth

UK plc has record levels of cash on its balance sheets, providing a strong base for economic growth, according to Legal & General.

Amid fears that consumer spending is about to tail off, after underpinning US and UK GDP growth for the past three years, L&G believes the anticipated upturn in corporate expenditure and merger and acquisition activity will drive economic growth onward.

Head of UK equities Mark Burgess says the slashing of corporate expenditure since the 2000 downturn has resulted in the average company’s free cashflow yield doubling from just over 5 per cent in 2000 to a little over 10 per cent in 2004.

This has led to an upswing in dividend payments by at least 8 per cent this year and increased volumes of share buybacks. With companies having lots of cash on their balance sheets, Burgess says M&A activity is likely to increase.

In the US, he says the situation is more stark, with the amount of cash on company balance sheets equivalent to 20 per cent of the capitalisation of the S&P 500 index.

He says this is healthy in the short term but if companies continue to reduce investment in their business, profit growth will be hit after about 10 years.

Economist Andrew Clare says he does not expect the UK general election to have a major impact on the equity market, with the bond market likely to be more sensitive to any unforeseen Governments borrowing requirements announced after the poll.

Burgess says: “The consumer has been the big driver of UK and US GDP growth but this is likely to tail off because of interest rate rises and we expect corporate expenditure to pick up and underpin economic growth.”

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