* 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 European companies that have stepped up spending to exploit a modest improvement in growth prospects instead of hoarding cash or handing it to their shareholders.
That may suggest that fortune, and investor equity allocations, could continue favouring the brave - companies that follow suit and use strong cash positions to make more nuts-and-bolts investments in the coming months.
Spending on the infrastructure that drives business activity, capital expenditure or capex, has surged in 2013 as companies grow more confident about some kind of economic pick-up and try to support relatively high share prices in the face of weak earnings.
Those that led the charge have seen their share prices outperform their more cautious peers in recent months, suggesting a change in mindset from the height of the financial crisis, when investors tended to reward companies that held onto their money to shore up their balance sheets.
Among a Thomson Reuters StarMine selection of companies that have raised capex by up to 50 percent from a year earlier, and which share strong business fundamentals, four out of five outperformed their country benchmark indices in the last 90 days.
"During 2011 there was no link between capex spending and price performance," Peter Oppenheimer, an analyst at Goldman Sachs, said recently in a note. "It now appears that companies are seeing greater reward for increasing their capex," he said.
How might you use that knowledge to pick the right stocks in the future? One method might be to use the same Starmine search as above, but to add back those companies that have strong fundamentals - a strong cash position and a high rate of creditworthiness - 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, a top third ranking for creditworthiness and a strong anticipated free cash flow.
This threw up 12 companies, seven of them listed in the UK, including property website Rightmove, house builders Berkeley and Bovis Homes, investment manager Ashmore, chip designer ARM, drug company BTG and IT services provider Aveva.
The others were France's Hermes and Switzerland's Swatch, Irish betting firm Paddy Power, German online payment systems firm Wire Card and Dutch chip equipment maker ASML.
Only ARM, Hermes and Paddy Power underperformed their country benchmark over the last 90 days.
"The pattern of improved performance for companies that are being more proactive with their cash is an encouraging trend and one that should continue to support rising shareholder returns," said Oppenheimer.
According to a Reuters poll of economists on Wednesday, the euro zone economy will return to modest growth in the second half of this year after stagnating in three months from May to July.
Companies seem already to be investing more in their operations to seize opportunities in the hoped-for upturn.
Almost halfway through 2013, capital spending by listed European 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 in 10 years and, over the last six months, firms have also taken on more debt to fund spending, Datastream data showed.
"We regard (the increase in capex) as an encouraging sign as we saw similar trends in 1994 and 2004. In both instances, it signalled the start of a multi-year capex cycle that coincided with robust top-line growth and strong equity performance," HSBC analysts said.
Claudia Panseri, equity strategist at Societe Generale Private Banking, expected UK companies, particularly because of their exposure to U.S. growth, to increase capex by more than their more Asia-focused euro zone counterparts. Among sectors, spending could rise most in information technology.
"Capex is certainly an important trade idea to start looking into in the second part of 2013," said Panseri, while cautioning that strong fundamentals remained vital.
At the height of the crisis, investors tended to reward companies that preserved cash and strengthened balance sheets.
When the worst of the crisis subsided, the overriding preference of investors for strong balance sheets gave way to another for firms that returned more of their cash to shareholders, either through dividends or share buybacks.
That has left many of those stocks looking expensive according to the standard metrics used by analysts.
There are warnings, however, for those investors thinking of betting on rising capex alone.
Shares in mobile telecoms group Vodafone fell after it unveiled a plan to boost UK expenditure by more than 50 percent. Investors worried this could signal smaller dividends.
Equally, the materials sector, which includes miners, leads the way with capex up 19 percent year-on-year, but the sector is an 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. Some sectors have a problem of competition and pricing power and then at the end you have profits squeezed," said Geoffroy Goenen, head of thematic European equity management at Dexia.