Business News

Global economy needs boost, developed countries' firms not investing enough

Monday, 10 March 2014

Companies in advanced countries are in a stronger position today but they are not investing enough to boost the global economy.

Rather than deploying their abundant cash in new investments to expand capacity and tap new markets, many companies have so far preferred (or have been pressured by activist investors) to give it back to shareholders, wrote Mohamed A El-Erian, CEO and co-CIO of Pimco, the world’s largest bond manager, in his Project Syndicate column.

Last year alone, US companies authorised more than US$600bil of share buybacks, which was a record high.

Many companies boosted their quarterly dividend payouts to shareholders.

Such activity continued in the first two months of 2014, he said in his column, which appeared in The Guardian.

But while shareholders have clearly benefited from companies’ unwillingness to invest their ample cash, the bulk of the injected money has been circulating only in the financial sector.

“Little of it has directly benefited economies that are struggling to boost their growth rates, expand employment, avoid creating a lost generation of workers, and address excessive income inequality,’’ said Mohamed El-Erian.

Listing several factors that pose as constraints, he said a lot more time, effort and global co-ordination is required.

That is not happening fast enough to attain the faster growth that their citizens’ well being – and that of the global economy – urgently requires.

It is understandable that these companies are reluctant to invest in the wake of the 2008 financial crisis.

But they need to take a constructive view of the long term requirement for growth.

The debate over the bonus cap by the European Union (EU), which restricts bonuses to 100% of salary, or 200% if shareholders approve, is gathering steam.

One of the architects of the EU’s cap on bankers’ bonuses, Philippe Lamberts, the Belgian Green Member of the European Parliament, has called for the UK government to be sued for allowing banks to sidestep the new rules.

His call for action coincides with two more high street banks preparing to hand their bosses up to £1mil in extra pay.

Lloyds bank boss, António Horta-Osório, was given £900,000 in shares to sidestep EU bonus cap, said The Guardian.

He receives shares in the bailed-out bank on top of a £1.1mil salary to ensure he does not suffer fall in earnings.

Earlier, HSBC announced it was handing its boss, Stuart Gulliver, £1.7mil in shares a year to maintain his pay package.

Barclays faced criticism last month when it revealed that its bonus pool would rise from £2.2bil to £2.4bil even though profits fell across the group.

Investment bank bonuses increased from £1.4bil to £1.6bil, with profits falling 37%.

Barclays chief executive officer, Antony Jenkins told The Telegraph that he was forced to increase bonus payments to senior executives after hundreds of key staff left the investment bank in America.

It looks like these banks are faced with a pack of falling dominoes.

Shareholders need to exercise some patience in waiting for the long term results.

Commodity trade financing in Singapore is heating up with new Asian entrants gearing up to give a good fight to the traditional European banks.

While traditionally dominated by European banks in the past, banks such as the DBS Group and more recently, Chinese banks such as ICBC, Bank of China and China Construction Bank have also muscled their way into the business.

This follows the European sovereign debt crisis in 2011 which caused many European banks to rein in their lending, said the Singapore Business Times (SBT).

Since then, European banks have made a comeback as such facilities give commodity traders access to more liquidity at a lower cost.

Commodity inventory financing includes traders pledging a warehouse receipt for a secured loan to a repurchase transaction where the bank takes over the ownership of the commodities for a short period of time.

A certain level of expertise, familiarity and knowledge of risk involved are required for a successful set-up.

The growth story in Asia for commodity trade financing is encouraging.

But traders have to be mindful that in the euphoria of rising volumes, they do not start speculating on these trades.

Columnist Yap Leng Kuen agrees that

companies should take a more proactive role in global investment.

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