(Reuters) – Despite the drama concerning U.S. agencies potentially dimming lights due to the sequester saga, global companies are brightening the scenario for technology purchasing. That could spark a turnaround in the sluggish sector.

Telecommunication services and information technology are laggards in the U.S. stock market’s current bull rally, up only 3.6 percent and 2 percent year-to-date, respectively, through February 22. That compares with a 6.6 percent rise for the broader S&P 500 Index.

This contrasts with consumer staples and discretionary items, which are up more than 9 percent and 5.8 percent, respectively, according to S&P. This reflects widespread optimism that consumer spending will return.

But there are signs that the beleaguered tech sector is about to be bolstered. Companies from service providers to manufacturers are starting to ramp up their information technology (IT) spending, which is a clear sign that economic confidence is in vogue and a business cycle is on the upswing. As more employees than ever are working from home or on the road, companies are updating their “fleet” of company-provided communications devices and data services.

The largest segment of IT spending, according to research firm Gartner Inc, will be in global telecom, which includes mobile data and voice services. IT services and devices – PCs, tablets, phones and printers – are next on the spending priority list. Although telecom service spending is forecast to rise only 2.4 percent this year, enterprise software and device purchases are expected to climb more than 6 percent each.

Despite myriad economic difficulties around the world, information technology spending worldwide posted record annual growth of nearly 6 percent last year, according to the International Data Corporation. Spending on smartphones in 2012 exceeded PCs for the first time, reaching almost $300 billion, while PC spending declined to $233 billion, IDC reported. That trend is expected to continue this year.

NEXT WAVE

The last major wave of tech spending occurred prior to 2000. The sector would have been due for another cycle of capital spending by 2008, but it was delayed because of the financial meltdown. While spending might not be as robust as during the run-up to 2000, this cycle could be broad-based and focused on a wide range of products and services.

Worldwide information technology spending is forecast to climb 4.2 percent from 2012 levels, according to the Gartner Group. A Thomson Reuters survey released on February 22 found that S&P 500 firms’ spending plans are exceeding analysts’ estimates. That translates into more capital expenditures. The bulk of the tech spending, Gartner forecasts, will be directed at enterprise software, information technology services and devices.

Investors need to pay attention because tech companies have a long way to go before they are seen as overvalued. They also have yet to be classified as a genuine comeback sector like financials, which are up nearly 8 percent this year, although that may change this year as more buying shifts to technology.

A hidden benefit to owning technology stocks right now is that many of the leaders in this sector are swimming in cash and are beginning to pay dividends. Apple Inc, for one, is down 35 percent from its September peak through Thursday, but is sitting on a $137 billion cash hoard and paid its first dividend last year.

WHERE TO INVEST

Investors do best with balanced portfolios that spread investments broadly across a sector or index. But with tech funds, this is tricky because most have large concentrations in Apple, which still has more downside risk as it faces stiffer competition in the phone and tablet lines from Android-based products from Samsung Electronics Co Ltd and others.

Here are some ETFs that fit the bill for either broad or focused investments in the sector:

– Guggenheim S&P 500 Equal Weighted Technology ETF

Unlike most capitalization-weighted indexes that load up on the most popular – and overvalued – stocks, this fund reduces individual holdings to under 2 percent per stock. It includes leading hardware companies like Western Digital Corp and Seagate Technology Plc and software giant Symantec Corp. As a result, it is outperforming the general sector and is up 6 percent year-to-date through January 30.

– First Trust Dow Jones Internet Index

For a more specialized play that focuses on online companies, this fund covers a smaller slice of the tech sector. Internet mainstays including Google Inc, Amazon.com Inc and Yahoo Inc are all represented. This is a worthy consideration if you are banking on the trend that online retailers and advertising will continue to take business from the bricks-and-mortar world. The fund is up nearly 9 percent year-to-date.

– T. Rowe Price Science & Technology Fund

An actively managed fund that is up 5 percent year-to-date, science and technology offers a diverse mix ranging from the Chinese Internet firm Baidu Inc to the game company Nintendo Co Ltd.

For more from John Wasik see

(Reuters) – A gauge of planned U.S. business spending recorded its largest increase in more than a year in January, suggesting growing confidence in the durability of the economic recovery.

The case for the economy’s resilience was further bolstered by another report on Wednesday showing that contracts to buy previously owned homes approached a near three-year high last month. Housing is expected to underpin growth this year.

Non-defense capital goods orders excluding aircraft, a closely watched proxy for business spending plans, jumped 6.3 percent, the biggest gain since December 2011. These so-called core capital goods orders had slipped 0.3 percent in December.

“The encouraging tone of this report suggests that the business sector is beginning to feel sufficiently confident about the improving economic outlook to commit to investment activity,” said Millan Mulraine, a senior economist at TD Securities in New York.

In a separate report, the National Association of Realtors said its pending home sales index increased 4.5 percent to its highest since April 2010, just before a home-buyer tax credit expired.

The rise in signed purchase contracts, which become sales after a month or two, added to data such as building permits and house prices that have suggested a decisive turnaround in the housing market.

Home building added to growth last year for the first time since 2005 and economists expect another contribution this year.

Still, the reports are unlikely to change the Federal Reserve’s very easy monetary policy stance. Fed Chairman Ben Bernanke, testifying before Congress for a second straight day, pointed to the pick-up in housing as a sign the U.S. central bank’s aggressive easing of monetary policy is gaining traction.

However, he signaled a willingness to press forward with efforts to spur an even stronger recovery and lower the jobless rate, which remains at a lofty 7.9 percent.

Stocks on Wall Street ended more than 1 percent higher on the data and Bernanke’s comments, with the Standard & Poor’s 500 posting its best daily percentage gain since January 2. The U.S. dollar weakened against a basket of currencies, while prices for U.S. government debt fell.

FACTORY ACTIVITY COOLING

Although shipments of core capital goods, used to calculate equipment and software spending in the government’s measures of gross domestic product, fell last month, economists were little worried.

“The balance between orders and shipments of capital goods is looking healthier as backlogs of core capital goods orders rose for the first time in eight months,” said John Ryding, chief economist at RDQ Economics in New York.

“Our take is that manufacturing activity – especially in the capital goods area – is bouncing back after cautious behavior ahead of the fiscal cliff.”

U.S. factory activity, which helped lift the economy from recession, has cooled in recent months, held back by sluggish domestic demand, tighter fiscal policy in Washington and slowing global growth.

While business investment plans looked strong, the report showed that overall orders for durable goods – items ranging from toasters to aircraft that are meant to last three years or more – tumbled 5.2 percent as demand for civilian and defense aircraft collapsed. It was the first drop since August.

Orders for civilian aircraft, which are very volatile and which tend to fall at the start of the year, dived 34 percent.

Boeing received orders for only 2 aircraft, down from 183 in December. Economists said the decline was probably not related to the grounding of Boeing’s 787 Dreamliners after problems with overheating batteries.

“I haven’t heard any reports about airlines canceling their orders. This could be a one-month lull rather than something greater,” said Stephen Stanley, chief economist at Pierpont Securities in Stamford, Connecticut.

Defense aircraft orders plunged 63.8 percent after soaring 58.5 percent in December, likely as orders were pushed forward ahead of $85 billion in government-wide spending cuts set to kick in on Friday.

Overall defense capital goods orders plummeted 69.5 percent in January, the sharpest fall since July 2000.

But durable goods orders excluding transportation increased 1.9 percent last month, also the largest gain since December 2011, after increasing 1 percent in December. That was a sign factory activity continues to plod along.

(Reporting by Lucia Mutikani; Editing by Neil Stempleman and James Dalgleish)

(Reuters) – Consumer sentiment rose in February as Americans were more optimistic that the jobs market will improve, even as confidence in fiscal policy was near all-time lows, a survey released on Friday showed.

The Thomson Reuters/University of Michigan’s final reading on the overall index on consumer sentiment rose to 77.6 from 73.8 in January, topping expectations for attitudes to hold steady with February’s preliminary reading of 76.3.

Fewer Americans expected unemployment to rise, with survey respondents feeling slightly better about prospects for the economy. At the same time, 43 percent considered government economic policies to be poor and just 15 percent said the administration was doing a good job.

“Consumers find the blame-game for policy inaction a very unsatisfactory substitute for a concerted effort to improve the economy,” survey director Richard Curtin said in a statement.

Government spending cuts of $85 billion are set to start coming into force by the end of the day unless a last minute deal is reached in Washington, though few expect there will be one.

The barometer of current economic conditions rose to 89 from 85, while the gauge of consumer expectations gained to 70.2 from 66.6. All three consumer indexes were at their highest levels since November.

Worries about income growth and their weakened financial situations have made consumers more sensitive to inflation concerns. One-in-five respondents cited rising prices when asked about how their finances had recently changed.

The survey’s one-year inflation expectation was unchanged at 3.3 percent, while the survey’s five-to-10-year inflation outlook edged up to 3 percent from 2.9 percent.

(Reporting by Leah Schnurr; Editing by Chizu Nomiyama)

(Reuters) – The pace of growth in the U.S. manufacturing sector picked up to its fastest rate in over a year and a half in February as new orders continued to accelerate, an industry report showed on Friday.

The Institute for Supply Management (ISM) said its index of national factory activity rose to 54.2 from 53.1 in January, topping economists’ forecasts for a pullback to 52.5. It was the highest level since June 2011.

A reading above 50 indicates expansion in manufacturing. The sector lost traction in the second half of last year and contracted in November in the wake of the massive storm that hit the U.S. Northeast.

The new orders index jumped to 57.8 from 53.3, making for the highest level since April 2011. The gauge of production gained to 57.6 from 53.6, while inventories edged up to 51.5 from 51.

But the employment component slipped to 52.6 from 54.

In a sign of potential pressures emerging for companies, the prices paid index rose to the highest in a year to match 61.5 seen in February 2012, up from 56.5.

(Reporting by Leah Schnurr)

(Reuters) – Investors will have to grapple with two sets of rules for how banks recognize losses on loans after the world’s two main accounting regulators failed to agree a common approach.

At the height of the financial crisis in 2009, the Group of 20 industrial and industrializing nations asked the International Accounting Standards Board (IASB) and the U.S. Financial Accounting Standards Board (FASB) to align their rules to make cross-border comparisons between companies easier.

They specifically requested new rules to force banks to acknowledge impaired loans much sooner, which might allow them to address problems in good time and prevent a repeat of taxpayer bailouts.

IASB Chairman Hans Hoogervorst said on Monday the board’s new impairment rule would be published in early March but alignment with the U.S. equivalent was highly unlikely.

“It’s still a long shot. We are taking a different course,” Hoogervorst told a meeting of the board’s advisory council, and ruling out a shift by the IASB to the U.S. model.

FASB wants all expected losses on a loan to be recognized up front while the IASB, whose rules are used in over 100 countries, thinks there should be an actual deterioration in a loan, such as late payment, before losses have to be recorded.

“The outside world, especially the regulatory community, is growing increasingly restless. I understand that and we are going to finish, whatever it takes,” Hoogervorst, a former Dutch finance minister and markets regulator, said.

“We cannot wait for a magic moment of convergence to come. If we can’t get a joint solution, then so be it.”

In a public consultation of its proposals, the IASB will ask whether a planned January 2015 start date for its new rule is still practical.

IASB officials also said requiring banks to make disclosures to bridge the gap between two different sets of rules could be costly.

INSURANCE CONCERNS

The IASB will also publish in June draft revisions to its insurance contracts accounting rule but seek feedback on only a handful of elements, raising concerns in the industry.

“We believe there are still a lot of important issues. It’s very difficult to have a clear view of how the model proposed will work,” Jacques Le Douit of the European Insurance and Reinsurance Federation told the meeting.

The changes proposed could introduce volatility into financial statements, added Jerry de St. Paer from the Group of North American Insurance Enterprises.

Hoogervorst said the sector had already won several concessions and, despite a decade of deliberation, there was still no accounting rule to show where insurers stood.

Accounting risked failing to flag problems unless the rule was changed in a timely way, he said.

“We have got to get this done. I am much more worried about this than impairment. At least everybody knows the banks are in trouble and they are probably hiding some losses. In insurance, I don’t think we know,” Hoogervorst added.

(Reporting by Huw Jones; Editing by Mark Potter)

(Reuters) – As BlackBerry launches the first smartphone from its make-or-break BB10 line in India, one of its most loyal markets, the company faces new competition from a formidable rival that has long had a minimal presence in the country.

More than four years after it started selling iPhones in India, Apple Inc is now aggressively pushing the device through installment payment plans that make it more affordable, a new distribution model and heavy marketing blitz.

“Now your dream phone” at 5,056 rupees ($93), read a recent full front-page ad for an iPhone 5 in the Times of India, referring to the initial payment on a phone priced at $840, or almost two months’ wages for an entry-level software engineer.

The new-found interest in India suggests a subtle strategy shift for Apple, which has moved tentatively in emerging markets and has allowed rivals such as Samsung and BlackBerry to dominate with more affordable smartphones. With the exception of China, all of its Apple stores are in advanced economies.

Apple expanded its India sales effort in the latter half of 2012 by adding two distributors. Previously it sold iPhones only through a few carriers and stores it calls premium resellers.

The result: iPhone shipments to India between October and December nearly tripled to 250,000 units from 90,000 in the previous quarter, according to an estimate by Jessica Kwee, a Singapore-based analyst at consultancy Canalys.

At The MobileStore, an Indian chain owned by the Essar conglomerate, which says it sells 15 percent of the iPhones in the country, iPhone sales tripled between December and January, thanks to a monthly payment scheme launched last month.

“Most people in India can’t afford a dollar-priced phone when the salaries in India are rupee salaries. But the desire is the same,” said Himanshu Chakrawarti, its chief executive.

Apple, the distributors, retailers and banks share the advertising and interest cost of the marketing push, according to Chakrawarti. Carriers like Bharti Airtel Ltd, which also sell the iPhone 5, run separate ads.

India is the world’s No. 2 cellphone market by users, but most Indians cannot afford fancy handsets. Smartphones account for just a tenth of total phone sales. In India, 95 percent of cellphone users have prepaid accounts without a fixed contract. Unlike in the United States, carriers do not subsidize handsets.

Within the smartphone segment, Apple’s Indian market share last quarter was just 5 percent, according to Canalys, meaning its overall penetration is tiny.

Still, industry research firm IDC expects the Indian smartphone market to grow more than five times from about 19 million units last year to 108 million in 2016, which presents a big opportunity.

Samsung Electronics Co Ltd dominates Indian smartphone sales with a 40 percent share, thanks to its wide portfolio of Android devices priced as low as $110. The market has also been flooded by cheaper Android phones from local brands such as Micromax and Lava.

Most smartphones sold in India are much cheaper than the iPhone, said Gartner analyst Anshul Gupta.

“Where the masses are – there, Apple still has a gap.”

‘I LOVE INDIA, BUT…’

Apple helped create the smartphone industry with the iPhone in 2007. But last year Apple lost its lead globally to Samsung whose smartphones, which run on Google Inc’s free Android software, are especially attractive in Asia.

Many in Silicon Valley and Wall Street believe the surest way to penetrate lower-income Asian markets would be with a cheaper iPhone, as has been widely reported but never confirmed. The risk is that a cheap iPhone would cannibalize demand for the premium version and eat into Apple’s peerless margins.

The new monthly payment plan in India goes a long way to expanding the potential market, said Chakrawarti.

“The Apple campaign is not meant for really the regular top-end customer, it is meant to upgrade the 10,000-12,000 handset guy to 45,000 rupees,” he said.

Apple’s main focus for expansion in Asia has been Greater China, including Taiwan and Hong Kong, where revenue grew 60 percent last quarter to $7.3 billion.

Asked last year why Apple had not been as successful in India, Chief Executive Tim Cook said its business in India was growing but the group remained more focused on other markets.

“I love India, but I believe that Apple has some higher potential in the intermediate term in some other countries,” Cook said. “The multi-layer distribution there really adds to the cost of getting products to market,” he said at the time.

Apple, which has partly addressed that by adding distributors, did not respond to an email seeking comment.

Ingram Micro Inc, one of its new distributors, also declined comment. Executives at Redington (India) Ltd, the other distributor, could not immediately be reached.

BlackBerry, which has seen its global market share shrivel to 3.4 percent from 20 percent over the past three years, is making what is seen as a last-ditch effort to save itself with the BB10 series.

The high-end BlackBerry Z10 was launched in India on Monday at 43,490 rupees ($800), close to the 45,500 rupees price tag for an iPhone 5 with 16 gigabytes of memory. Samsung’s Galaxy S3 and Galaxy Note 2, Nokia’s Lumia 920 and two HTC Corp models are the main iPhone rivals.

BlackBerry will target corporate users and consumers in India for the Z10, said Sunil Dutt, India managing director, adding that it will tie-up with banks for installment plans.

Until last year, BlackBerry was the No. 3 smartphone brand in India with market share of more than 10 percent, thanks to a push into the consumer segment with lower-priced phones. Last quarter its share fell to about 5 percent, putting it in fifth place, according to Canalys. Apple was sixth.

(Additional reporting by Aradhana Aravindan in MUMBAI and Poornima Gupta in SAN FRANCISCO; Editing by Tony Munroe, Mark Bendeich and Chris Gallagher)

(Reuters) – One by one, the entrepreneurs, clad in crisp blue jeans and armed with PowerPoint presentations, stood before a roomful of investors and tech bloggers to explain their dreams of changing the world.

For these exuberant times in Silicon Valley, the scene was familiar; the setting, less so.

With the young and ambitious flocking again to northern California to launch Internet companies, there were signs one recent morning that startup mania has taken hold even behind the faded granite walls of California’s most notorious prison.

“Live stream has gone mainstream. Mobile video usage went up and is expected to increase by 28 percent over the next five years,” said Eddie Griffin, who was pitching a music streaming concept called “At the Club” and happens to be finishing a third stint for drug possession at San Quentin State Prison, near San Francisco, after spending the last 15 years behind bars.

Griffin was one of seven San Quentin inmates who presented startup proposals on “Demo Day” as part of the Last Mile program, an entrepreneurship course modeled on startup incubators that take in batches of young companies and provide them courses, informal advice and the seed investments to grow.

According to business news website Xconomy, incubator programs – which it tracks – have tripled in number for each of the past three years, proliferating from Sao Paulo to Stockholm at a pace that has fueled talk in tech circles of an “incubator bubble”.

Last Mile founder Chris Redlitz, a local venture capitalist, says his goal was never to seek out a genuine investment opportunity inside a prison but to educate inmates about tech entrepreneurship and bridge the knowledge gap between Silicon Valley’s wired elite and the rest of the region’s population.

Inmates, after all, are not allowed to run businesses. They do not have access to cellphones — much less Apple Inc’s latest iPhone developer toolkits — and they use computers only under close supervision.

A LOT TO LEARN

After his presentation in San Quentin’s chapel, which received a rousing reception from an audience that included prison warden Kevin R. Chappell, Griffin told a reporter it was unlikely he would launch his startup idea immediately after being released this summer.

“I still have a lot to learn,” said the soft-spoken Detroit native. “I’ve never used a cellphone. Technology is kind of foreign in this environment.”

But to hear the inmates use jargon such as “lean startup” and “minimum viable product” speaks to an unmistakable truth about the Bay Area zeitgeist, where startups, for better or worse, have come to embody upward mobility, ambition, and hustle.

“If they were doing this in the ’80s there may have been a different theme or model,” said Wade Roush, Xconomy’s chief correspondent. “But in this day and age, becoming an entrepreneur or starting a business is a form of self-actuation.”

Situated on prime waterfront land, San Quentin is perhaps California’s most storied prison and home to the state’s only death row. But it has also kept a longstanding progressive reputation, boasting a rare college degree-granting program and vibrant arts courses.

The Last Mile accepted 10 inmates out of 50 applicants for its latest batch. The program, which graduated its first class of inmates last year, meets twice a week to discuss startups and lasts six months, although the most recent class took seven months due to a prison lockdown last year.

Some Last Mile participants, under official supervision, have also joined the online question-and-answer site Quora to respond to questions about prison life or describe what it felt like to commit murder.

The latest batch of startup ideas included a fitness app that would motivate drug addicts to exercise, a cardiovascular health organization, a social network for sufferers of post-traumatic stress disorder, a food waste recycling program, and an e-commerce site for artists in prison.

DIFFERENT PERSPECTIVE

Because the likelihood is not great that these companies will become funded and succeed, Redlitz said he was also working to place the inmates in jobs at tech companies after their release.

Rocketspace, a startup co-working space in downtown San Francisco, has agreed to host an internship. Rally.org, a crowd-funding site that counts Redlitz among its investors, said it hoped to begin a program to seek micro-investments from the public for the inmates’ ideas.

Sitting in the Demo Day audience was John Collison, the 22-year-old co-founder of online payments startup Stripe, who noted some stark differences between the inmates’ proposals and the fashionable startups du jour in Silicon Valley.

“What’s frustrating is that all these companies in the Valley, they’re ideas for the 1 or 10 percent,” Collison said. “You have startups like Uber or Taskrabbit, that’s like, ‘Oh, here’s something to help you find a driver or find someone to clean your house.’ Are they solving real problems?”

The San Quentin inmates “were talking about urban obesity, or PTSD”, Collison said. “It’s a completely different perspective. We actually really need that.”

(Reporting by Gerry Shih; Editing by Dale Hudson)

(Reuters) – U.S. companies’ capital spending plans are holding up, and mostly exceeding Wall Street forecasts, in the face of policy concerns created by arguments in Washington over the fiscal cliff, the debt ceiling and now automatic spending cuts.

Their willingness to spend on new offices, plants and machinery, as well as a pickup in deal making, shows that they are starting to dig into the massive amounts of cash that has been collecting more dust than interest on their balance sheets. That could prove a welcome counterpunch to a softer outlook for spending by consumers and government.

A Thomson Reuters analysis shows that for 2013, more Standard & Poor’s 500 firms are forecasting capital expenditures that exceeded analysts’ expectations than at any time in the past four years. Recent U.S. government data showed a rise in equipment and software spending in the final quarter of 2012.

If companies ratchet up spending, that could help unleash more hiring and extend the early-year rally in stocks, which tend to rise along with business spending.

“Once businesses start spending, that really means not only are they going to be buying goods, but they’re going to be hiring Americans, and those things are really what’s going to be the multiplier that helps to take this recovery and move it into greater expansion mode,” said Burt White, managing director and chief investment officer at LPL Financial in Boston.

Not all the money will be spent on new projects, of course. And the spending plans announced so far are only slightly above last year’s average. But they comfortably exceed the expectations of analysts, whose capex forecasts fell this year.

Part of the reason may have been the dire predictions about the “fiscal cliff” late last year when analysts were putting together their capex forecasts. At least some chief executives, including DuPont’s (DD.N), blamed uncertainty over U.S. government budget and tax policy for a reluctance to invest and hire.

“A number of companies said we’re planning our budget cycle on worst-possible conditions,” said Fred Dickson, chief market strategist, D.A. Davidson & Co. Lake Oswego, Oregon.

That companies have turned more optimistic than analysts heartens investors because it amounts to a vote of confidence in the U.S. economy, which has been hobbled by high unemployment and household debt, and now faces curbs in government spending.

Another sign of confidence is the recent flurry of merger and acquisition activity. The $173 billion in U.S. deals announced so far in 2013 is more than double the volume seen last year at this time, according to Thomson Reuters Deals Intelligence.

After the financial crisis began in 2007, companies slashed expenses and jobs, and they remained diligent about keeping costs down even as the economy exited recession in mid-2009.

Federal Reserve data shows non-financial U.S. companies had $1.7 trillion of liquid assets, or cash, on their books as of the end of the third quarter of 2012.

MOVING OFF THE SIDELINES

The U.S. economy grew at a 2.2 percent clip in 2012 and is expected to slow to 1.9 percent this year as higher payroll taxes and government spending cuts take a bigger bite. Yet even with the economic outlook cloudy, things seem to be changing.

Of the S&P 500 companies that have issued capex guidance so far in 2013, 66 percent have spending plans that exceed analysts’ expectations, the Thomson Reuters analysis showed. That’s up from 57 percent in 2012, 59 percent in 2011, 55 percent in 2010, and 40 percent in 2009.

Those that have issued guidance are expecting to spend $1.59 billion on average in 2013. While that’s only a modest increase from the 2012 average of $1.57 billion, it is above the analysts’ estimates. Those estimates went down, to $1.48 billion in 2013 from $1.51 billion on average in 2012.

The 2013 data is based on 221 companies that have reported, while the 2012 average was based on guidance from 279 firms.

“I think companies are getting a little bit more urgency to actually go ahead and proceed with their plans despite some of the remaining uncertainties around the fiscal cliff,” said Natalie Trunow, chief investment officer of equities at Calvert Investment Management whose firm manages about $13 billion in assets. “They have to remain competitive long term.”

Some large firms, including Apple (AAPL.O), have already announced plans to increase capex, and sectors with the highest percentage of companies exceeding capex estimates so far in 2013 include health care, consumer discretionary and energy, the Thomson Reuters data showed.

To be sure, some expenditures will go toward maintenance of existing equipment rather than new plants, said S&P analyst Howard Silverblatt.

Clearly some will also be overseas. But there has been a surge in investment in oil and gas production in the United States, and there are signs that some manufacturing is returning, thanks to the promise of a cheaper energy supply.

Apple, the biggest U.S. company by market capitalization, said it will spend $10 billion on capital improvements this year, about $2 billion more than last year. It ranked sixth in terms of capex projections for 2013.

Oil and gas producer Chevron (CVX.N) tops the list with about $33.4 billion of capex planned, followed by AT&T (T.N), ConocoPhillips (COP.N), Wal-Mart (WMT.N) and Intel (INTC.O), the Thomson Reuters data showed.

This spending could be crucial at a time when consumer and government spending are likely to decline. A rise in the payroll tax, higher gasoline prices and a delay in tax refunds slowed retail sales in January, a worrisome sign for the year. At the same time, a slate of across-the-board government spending cuts are set to take effect on March 1, barring a deal between the White House and Congress.

PROFIT MARGINS VULNERABLE?

Of course, big capital expenditures can take a toll on earnings. And investors have worried about the effect slower profit growth could have on the stock market, which started 2013 on a tear and briefly notched a five-year high.

Energy and other commodity areas have had big increases in capital spending over the last decade, a trend that could eventually hurt margins, said Vadim Zlotnikov, chief market strategist for AllianceBernstein in New York.

“I expect this very aggressive capital spending to create the type of cost inflation that would make it very difficult for profit margins to expand,” he said.

But John Carey, portfolio manager at Pioneer Investment Management in Boston, said the positives tend to outweigh the negatives. “There’s always a risk when companies invest, but without investment there can’t be any long-term growth.”

(Reporting by Caroline Valetkevitch; Editing by Steven C. Johnson, Daniel Burns, Martin Howell and Tim Dobbyn)

Decades of increasing vehicle weight may be coming to an end as cars get more lightweight materials.

(Reuters) – After a six-year lull, deal making is back with a vengeance. That means investors may need to rethink strategies to profit from increasing numbers of mergers and acquisitions.

Warren Buffett’s Berkshire Hathaway and Brazil’s 3G Capital Partners said on Thursday they would buy ketchup-maker H.J. Heinz for $23 billion, the same day AMR Corp and US Airways agreed to a merger worth $11 billion. These deals came a week after a group of shareholders led by company founder Michael Dell announced plans to take computer maker Dell private in a $24 billion buyout, and Liberty Media announced a $15.75 billion deal for British cable group Virgin Media.

Just in the past 24 hours, shares of Office Depot Inc and smaller rival OfficeMax Inc have soared on rumors that the two are in advanced talks for a merger that could be announced this week.

Deals are up 10.5 percent to $288 billion this year from the same period last year, according to Thomson Reuters data. Last year, global M&A rose just 2 percent to $2.6 trillion.

Analysts do not expect the value of this year’s deals to top the $4 trillion mark, as in 2007, mergers and acquisitions values should nonetheless jump significantly higher, thanks to a combination of low interest rates, high levels of cash on corporate balance sheets, and rising stock prices that give company executives the confidence to take risks. In a slow-growth economy, companies are also seeing it as a quick way to increase profits, and sometimes eliminate competitors, rather than invest in new operations of their own.

“I’m pretty negative about the market in general in 2013, but the one thing that could upset my hypothesis is M&A, because you have the perfect storm of conditions” for a rally, said Uri Landesman, president of New York-based Platinum Partners, with more than $1 billion in assets under management.

Mature companies with declining growth rates and lots of cash look to buy smaller companies to raise their earnings, which could push share prices higher as investors bid up the companies in potential deals, Landesman said. What’s more, cash-rich companies such as Apple have been targeted by activist investors for hoarding their dollars and not creating enough value for shareholders.

Investors who want to focus on mergers and acquisitions have two main options: play it safe with an arbitrage strategy, or make a bet that they can identify the next takeover targets.

MERGER FUNDS

The easiest way to benefit from potential mergers and acquisitions is through an arbitrage mutual fund or exchange-traded fund, analysts said.

These funds buy shares of the target company after an announcement while shorting the purchaser as a hedge in case the deal falls apart. This strategy tends to make money for investors as the spread between the deal price and the current stock price narrows. Investors rarely benefit from the pop in a share price once a deal is initially announced. Instead, this route is more akin to fixed income investing, where earning a positive return is the primary goal.

“People are starting to dip their toes back into the equity markets, and this is one way of doing it while focusing on capital preservation,” said Willis Brucker, an analyst who works on the $616 million Gabelli ABC fund, which charges a fee of 62 cents per $100 invested. The fund, which turns over its portfolio five or six times a year as deals close, also benefits from rising interest rates faster than an intermediate bond fund because there is little inflation risk, he said.

Because of their focus on capital preservation, arbitrage funds tend to underperform the broad stock market. The Gabelli fund’s 4.6 percent annualized return ranks among the top five funds among its 19 peers over the last decade, according to Morningstar, though its performance trails the S&P 500 index by 3.7 percentage points over that time. The fund also underperformed the Vanguard Total Bond Market Index fund by 0.3 percentage points over that span.

Investors could also opt for the IQ Merger Arbitrage ETF. The fund’s assets are only $12 million, giving it a relatively high bid-ask spread of 0.87 percent. Its track record, an annualized 0.1 percent over the last three years, is spotty compared with the broader S&P 500 over the same time.

“The merger concept was just not resonating with investors at all” after the financial crisis, said Adam Patti, the CEO of IndexIQ, the company behind the ETF. The fund, which costs 76 cents per $100 invested, is up 2.1 percent since the start of 2013, compared with a 0.6 percent rise in the average market neutral fund.

BUYING THE TARGETS

Investors looking for potential takeover targets could go to published lists from the likes of Morningstar, which includes Chesapeake Energy Corp, Leap Wireless International, and Kohl’s Corp among its 2013 takeover ideas. Some financial firms publish their own versions as well. UBS includes luxury retailer Burberry Group PLC, information technology company Legrand SA, and grocer Sainsbury PLC on its European “M&A Watch” list.

The downside of this method is that simply appearing on the Morningstar list, which has included more than 70 companies in each of the last two years, often leads to a rally in shares. So if you fail to act the moment the list is released, you may pay more for a stock that fails to attract takeover bids.

For instance, six companies that appeared on the Morningstar list in 2011 saw their stock appreciate by at least 17 percent between the time the list was published and the time they accepted takeover deals.

This year, Kohl’s is up 4 percent since Morningstar published its list January 29, more than double the performance of the S&P 500 over the same time. The company’s strong cash flow and growth potential makes it attractive to private equity investors, Morningstar noted.

A more lucrative bet for investors is to screen for small to midcap companies with cash on their balance sheets and good levels of free cash flow. These are the metrics that private equity investors look for when deciding to make a deal, said Brian Frank, portfolio manager of the $14.9 million Frank Value Fund, who looks for takeover targets as part of his strategy.

“Private equity funds love to borrow money and then have a company pay off that debt, which is very difficult to do if it already has a lot,” he said.

Frank began his position in True Religion Apparel Inc, a $715 million market cap company behind the high-end brand True Religion Jeans, in August.

He was attracted to the company because of the cash on its balance sheet, which at one time amounted to 40 percent of its market cap. In October it announced it was putting itself up for sale and while it has not disclosed any bids, Frank expects True Religion to be acquired for about $35 per share, a 25 percent premium from its current price.

Small-cap fund managers insist they don’t focus on takeover targets alone when buying a stock. Bruce Aronow, a portfolio manager of the $1.2 billion AllianceBernstein Small Cap Growth fund, expects a handful of the roughly 100 companies in his portfolio to be acquired in any given year.

To become part of his portfolio, a company must be growing earnings faster than consensus estimates. That strategy has helped his fund return an annualized 12.5 percent over the last 10 years, or 4.2 percentage points ahead of the S&P 500.

“We like companies that are on their way to becoming large quickly, and those are the companies that tend to get bought out,” Aronow said.

(Reporting By David Randall; Editing by Jennifer Merritt, Lauren Young and Martin Howell.)