QE Backfires as Dividend Quest Usurps Growth: Cutting ResearchSimon Kennedy
Worldwide quantitative easing may be making investors richer rather than encouraging business investment, according to Citigroup Inc.
Fulfilling the goals of central bankers such as Federal Reserve Chairman Ben S. Bernanke, ultra-low interest rates and bond purchases are encouraging investors to buy stocks. Policy makers’ intent was that asset prices and wealth would rise, encouraging consumers and businesses to spend more.
The sticking point is the particular equities investors are favoring, Robert Buckland, Citigroup’s London-based chief global equity strategist, said in a Nov. 21 report. His research suggests they tend to choose companies that issue dividends and buy back shares rather than those that invest in the economy.
“They’ll take a bigger dividend over a new factory, anytime,” Buckland wrote. “Policy makers may succeed in forcing capital into equities, but from their perspective, it is the wrong kind of capital: income seeking rather than growth seeking.”
U.S. companies spent $650 billion on share buybacks and dividends in 2011, compared with $580 billion for capital spending, the report said. In Europe, Citigroup found, the sectors that spent the most capital were given the lowest stock valuations by investors.
Executives are reacting to the incentives in a bid to encourage stock outperformance, Buckland said. Healthcare companies are cutting back on research, freeing up cash for dividends, for example. Telecommunications businesses now have the highest dividend yield and payout ratio of all sectors.
Buckland also found dividend funds have replaced growth-oriented emerging market funds as the best-selling equity products.
The perverse effects won’t stop policy makers from keeping rates low and eschewing the purchase of riskier assets such as stocks, Buckland said. Of concern, he said, is that governments may use taxes to clamp down on capital returns to shareholders.
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The world economy could get a boost of as much as $15 trillion, equivalent to the size of U.S. gross domestic product, if companies embrace something General Electric Co. calls the “Industrial Internet.”
A November 26 study by Fairfield, Connecticut-based GE says greater use of networks in which Internet-connected machines communicate and operate automatically could deliver efficiency gains. So-called intelligent machines could be better used to manage inventories and control deliveries, while workers could be better connected and become more efficient.
An example is the transportation industry, which GE estimates could reduce management costs by 10 percent, yielding $5.6 billion in savings a year. In aviation, a 1 percent reduction in jet fuel by better management of technology use could yield $30 billion in fuel savings over 15 years.
“The full potential of the Industrial Internet will be felt when the three primary digital elements -- intelligent devices, intelligent systems and intelligent automation -- fully merge with physical machines, facilities, fleets and networks,” wrote Marco Annunziata, GE’s chief economist. “When this occurs the benefits of enhanced productivity, lower costs and reduced waste will propagate through the entire industrial economy.”
If U.S. companies boosted annual productivity growth by as much as 1.5 percentage points, the payoff could be $15 trillion over two decades, said Annunziata and co-writer Peter C. Evans, GE’s director of global strategy and analytics.
Closer links between computer and machine would reduce wasted time and resources by allowing businesses to become more efficient and better predict customer needs, they said.
The first wave of Internet and communications technology boosted labor productivity growth to an annual average rate of 3.1 percent from 1995 to 2004, twice the pace of the previous 25 years. If the “Industrial Internet” reaped such growth by 2030, average income could rise by $20,000 per person.
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The global financial turmoil may have been triggered by an energy crisis rather than by excessive leverage among banks and governments.
So says Giles Keating, Geneva-based head of research for private banking and asset management at Credit Suisse Group AG. In a Nov. 27 report, he said the crisis was exacerbated and perhaps caused by the run-up in oil prices after 2005. That ended up with a barrel of oil costing almost $150 in 2008.
The oil constraint slowed economic growth and “debts that previously had seemed good turned sour and the financial crisis exploded,” Keating said.
Because the crisis “shockingly revealed to a complacent world” the lack of oil, governments may now pursue greater supply and make their economies less energy-dependent, Keating said. That could pave the way for a resumption of robust economic growth sooner than economists, focused on deleveraging, may assume, he said.
“The world can escape the ‘new normal’ of slow growth by increasing energy supply and efficiency,” he said.
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China’s investment may need to be cut by 10 percentage points from almost 50 percent of GDP to ensure better economic balance, according to a working paper published this month by the International Monetary Fund.
While China’s investment level is within the range of counterpart countries, it has surged in the last decade. That raises doubts over sustainability given that much of the investment is financed domestically, wrote IMF economists Il Houng Lee and Murtaza Syed, alongside Liu Xueyan of China’s Institute of Economic Research.
“The challenge is to engineer a gradual reduction in investment to a path that would maximize social welfare,” the report said, noting a crisis still appears unlikely.
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