In this article, independent investment strategist Gerard Minack questions the widely perceived notion that companies are under-investing. His analysis finds that corporates are investing, but most of them are receiving a diminishing return on this investment. In turn, this is likely holding back the prospect of the significant increase in business investment that policymakers yearn for. Despite declining corporate profitability (defined here by return on equity), investors have ironically been prepared to pay higher valuations for equities. The last chart here is superb – one of the best we have yet seen to demonstrate the impact QE has had on financial assets.
Business investment has recovered slowly since the Great Recession – policymakers are hoping businesses will spend more. But there are few signs of under-investment. Return on equity in developed markets has oscillated around a flat trend despite a 35 year trend decline in investment spending as a share of GDP (Exhibit 1).