Living in uncertain times – these are the negative effects

People across the decades have perhaps believed themselves to be living in an age of uncertainty, yet such a label would seem to attach itself naturally to the period through which we are passing.

Geopolitical storm clouds, not least in revived East-West tension, combined with the long shadow cast by the financial crisis create a gloomy outlook.

Uncertainty has significant effects on corporate investment, which, in turn, impacts on the level of economic growth. The more uncertain the future economic climate, the less willing firms are to put their capital at risk.

This topic is vast and can seem almost amorphous. To make the task seem less daunting let’s concentrate on the well-known macroeconomic effects of uncertainty through a microeconomic route. In other words, I will approach the question of the effects of uncertainty on corporate investment through a narrow, but revealing, prism.

The redeployability of assets

How easily would a company, having invested in assets such as machinery equipment, be able to sell them to another firm should an external shock force them to do so? And should it sell to a firm in the same line of business as the vendor or a quite different sector?

You may expect that a business able to buy and sell assets with ease may be more willing to invest in such assets than one likely to invest in less liquid and less redeployable assets. These are indeed my findings. And the redeployability of a firm’s assets has widespread implications beyond the immediate investment decision to include the capital structure of the business in question.

More of that in a moment.

First, let’s have a look at the secondary market for corporate assets. In aggregate, this market is worth more than US$100 billion in a typical year. This market performs a number of valuable functions, allowing idle plant and other equipment to be reactivated, to general economic benefit. For instance, providing a lower-cost route through which expanding companies can acquire the assets they need, and improving the creditors’ returns of insolvent businesses.

But while this is an active market, not all industries are equal in terms of finding ready buyers for surplus assets. Far from it.

Using data from the Bureau of Economic Analysis and the Compustat database, I have identified the 10 manufacturing industries with the most redeployable assets – and importantly, the 10 whose assets are the least redeployable.