How can you invest with mixed messages about recovery?

THE PROBLEM

Published: June 23 2009 22:48 | Last updated: June 23 2009 22:48

With so many conflicting messages about the economy’s recovery, chief executives are worried about hasty optimism. So how can a company determine a green shoot is not in fact a weed? And how should that affect investment decisions?

THE ADVICE

THE ECONOMIST

Joel Kurtzman
The question is not whether the green shoots of the economy are real. It is whether there will be sufficient rain, in the form of investment capital, to prevent the shoots from dying. Right now, there is plenty of capital available for large companies with strong balance sheets such as Cisco and HP. These companies have taken advantage of the previous season’s low rates to refinance their debt by going directly into the capital markets, and outside of the still-fragile banking system.
But, aside from money rushing into mutual funds, for most companies there is not a rain cloud in the sky. Rates have risen to almost usurious levels, especially for young companies. If the green shoots of recovery are to continue growing, capital must not just be plentiful, it must be cheap – or at least affordable. That is not the case today. At the same time, for new companies, venture investment has almost ceased to flow.
That is bad news, since small and start-up companies are the ones that create jobs and a jobless recovery will not be able to sustain today’s green shoots. Until rates come down and capital becomes plentiful, the recovery will proceed in fits and starts. The world is still waiting for it to rain. The writer is a former editor of Harvard Business Review and is now chairman of the Kurtzman Group. He is the author of ‘Global Edge: Using the Opacity Index to Manage the Risks of Cross-Border Business’