In its recently published Business and Finance Outlook, the Organization for Economic Cooperation and Development (OECD) pointed out a growing divergence where global investors are piling into more risky assets while most businesses still are not making major investments.
The OECD urged global policy makers and financial regulators to closely monitor financial markets as investors continue to desperately seek yield in leveraged hedge funds and risky private equity.
Statement from OECD secretary general Angel Gurria
“Stock markets in advanced economies are punishing firms that invest,” OECD secretary general Angel Gurria said in a presser announcing the report to the media. “The incentives are skewed.”
More on OECD report warning of global bubble in stock markets
Based on the OECD’s research, investors are buying and driving up the price of stocks focused on share-buybacks, dividends, mergers and acquisitions rather than companies making long-term investments in research and development.
According to the OECD, buying shares in companies in U.S. stock markets with a low investment spending while selling those with high capital expenditure from 2009 to 2014 would have boosted a model portfolio by 50%.
In issuing this report, the OECD is joining the International Monetary Fund and many central banks worldwide in expressing worries that zero or even negative interest rates is preventing insurers and pension funds from living up to their guarantees, which could threaten their solvency (and by implication, imperil the entire global financial system).
In agreeing with the conclusions of the OECD report, Antoine Lissowski, the deputy CEO of French life insurer CNP Assurances, argued that the investment industry needed to move clients out of products promising guaranteed returns and towards unit-linked investments, where clients bear a greater share of the risk.
Rebuttal from Fidelity
Fidelity Worldwide CIO for equities Dominic Rossi disagreed with the OECD’s take on business investment, saying that for every dollar of depreciation companies were reporting that 1.3 was invested.
“Our own analysis would point to quite healthy levels of investment,” Rossi commented, but noted that levels of long-term investment lower in the U.S. than in other nations.