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* Rise in capex a positive signal for equities
* 2013 spending already more than the whole of 2012
* Companies increasing leverage, cash levels falling
* UK firms seen as most likely to increase spending
By David Brett
LONDON, June 13 (Reuters) - Investors are rewarding Europeancompanies that have stepped up spending to exploit a modestimprovement in growth prospects instead of hoarding cash orhanding it to their shareholders.
That may suggest that fortune, and investor equityallocations, could continue favouring the brave - companies thatfollow suit and use strong cash positions to make morenuts-and-bolts investments in the coming months.
Spending on the infrastructure that drives businessactivity, capital expenditure or capex, has surged in 2013 ascompanies grow more confident about some kind of economicpick-up and try to support relatively high share prices in theface of weak earnings.
Those that led the charge have seen their share pricesoutperform their more cautious peers in recent months,suggesting a change in mindset from the height of the financialcrisis, when investors tended to reward companies that held ontotheir money to shore up their balance sheets.
Among a Thomson Reuters StarMine selection of companies thathave raised capex by up to 50 percent from a year earlier, andwhich share strong business fundamentals, four out of fiveoutperformed their country benchmark indices in the last 90days.
"During 2011 there was no link between capex spending andprice performance," Peter Oppenheimer, an analyst at GoldmanSachs, said recently in a note. "It now appears that companiesare seeing greater reward for increasing their capex," he said.
How might you use that knowledge to pick the right stocks inthe future? One method might be to use the same Starmine searchas above, but to add back those companies that have strongfundamentals - a strong cash position and a high rate ofcreditworthiness - but might not yet have increased investment.
Reuters sifted for European firms worth over $500 million,with cash to cover twice what they plan to pay in dividends,estimated revenue growth of more than 10 percent next year, atop third ranking for creditworthiness and a strong anticipatedfree cash flow.
This threw up 12 companies, seven of them listed in the UK,including property website Rightmove, house buildersBerkeley and Bovis Homes, investment managerAshmore, chip designer ARM, drug company BTG and IT services provider Aveva.
The others were France's Hermes and Switzerland'sSwatch, Irish betting firm Paddy Power, Germanonline payment systems firm Wire Card and Dutch chipequipment maker ASML.
Only ARM, Hermes and Paddy Power underperformed theircountry benchmark over the last 90 days.
"The pattern of improved performance for companies that arebeing more proactive with their cash is an encouraging trend andone that should continue to support rising shareholder returns,"said Oppenheimer.
According to a Reuters poll of economists on Wednesday, theeuro zone economy will return to modest growth in the secondhalf of this year after stagnating in three months from May toJuly.
Companies seem already to be investing more in theiroperations to seize opportunities in the hoped-for upturn.
Almost halfway through 2013, capital spending by listedEuropean companies is already more than for the whole of 2012,Thomson Reuters Datastream data showed.
Corporate cash balances fell in 2012 for the first time in10 years and, over the last six months, firms have also taken onmore debt to fund spending, Datastream data showed.
"We regard (the increase in capex) as an encouraging sign aswe saw similar trends in 1994 and 2004. In both instances, itsignalled the start of a multi-year capex cycle that coincidedwith robust top-line growth and strong equity performance," HSBCanalysts said.
Claudia Panseri, equity strategist at Societe GeneralePrivate Banking, expected UK companies, particularly because oftheir exposure to U.S. growth, to increase capex by more thantheir more Asia-focused euro zone counterparts. Among sectors,spending could rise most in information technology.
"Capex is certainly an important trade idea to start lookinginto in the second part of 2013," said Panseri, while cautioningthat strong fundamentals remained vital.
SMALLER DIVIDENDS?
At the height of the crisis, investors tended to rewardcompanies that preserved cash and strengthened balance sheets.
When the worst of the crisis subsided, the overridingpreference of investors for strong balance sheets gave way toanother for firms that returned more of their cash toshareholders, either through dividends or share buybacks.
That has left many of those stocks looking expensiveaccording to the standard metrics used by analysts.
There are warnings, however, for those investors thinking ofbetting on rising capex alone.
Shares in mobile telecoms group Vodafone fell afterit unveiled a plan to boost UK expenditure by more than 50percent. Investors worried this could signal smaller dividends.
Equally, the materials sector, which includes miners, leadsthe way with capex up 19 percent year-on-year, but the sector isan underperfomer in 2013 as profit forecasts continue to be cut,albeit mostly as the result of weaker commodity prices.
"Increased capex will of course affect profitability. Somesectors have a problem of competition and pricing power and thenat the end you have profits squeezed," said Geoffroy Goenen,head of thematic European equity management at Dexia.
