(November 12, 2013) — Continued quantitative easing (QE) programs around the world could force investors to seek higher incomes from companies at the expense of the economy, according to asset manager Schroders.
Central bank action that has resulted in ever-lower bond yields could push investors to inevitably turn to companies for other sources of income.
“Firms are increasingly being run for cash to meet investors’ near term income needs, rather than as vehicles who look to invest and grow their businesses,” a report from the fund manager said.
The growing trend for investors to cash out companies is not good for the economy, Schroders found. These moves have hit capital expenditure (capex) levels, particularly as investors have shown preference to companies that are spending less on themselves, and instead handing out higher dividends—thereby reducing overall corporate cash surplus.
According to Schroders, dividends have increased by $200 billion—or 43%—over the past year, compared to the 4% in increase of pre-tax profits. This outpacing of dividends has contributed to a cutback in corporate cash surpluses.
With weak capex and QE continuing to hang around, Schroders said it expects the US economy to find “capacity constraints” in the near future. The outcome is less than favorable—an unavoidable pause in economic growth.
“The result would be an early pick-up in inflation putting the central banks in the invidious position of having to tighten policy and curtail growth at a time when unemployment was still unacceptably high,” the report said. The economy could face an even more severe budget deficit in this projection.
However, Schroders assured that all is not lost. Despite a slow increase in business investments across the world—US capex is expected to rise by only 2.7% this year, compared to a 7% annual pace in both 2011 and 2012—the demand for capital goods has slightly picked up in the US, Germany, and Japan. Schroders even predicted a “capex revival” in 2014 that would support global economic growth.
Such optimism is accompanied by caution, the report said. Washington’s most recent budget face-off could incite another suspension on companies’ capex spending as investors become once again uncertain about demand.
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