Instant gratification through finance

After the splurge of the dotcom era, an underinvestment hangover was inevitable, writes John Plender. But why, against a benign financial background, has fixed capital investment in the US and much of the developed world remained weak this economic cycle. Business’s perception of risk appears completely at odds with views in the credit markets.

One explanation is that US multinationals are putting more of their investment into emerging markets rather than at home. Investment plans may also reflect unduly subdued expectations of economic growth in the US and the world economy.

But companies have been investing in their own equity through M&A and a wave of share buybacks. HSBC points out that companies are being forced to borrow to fund their buyback programmes, while business investment is being squeezed.

Henry Kaufman argues that buybacks and takeovers offer instant gratification whereas building a new plant is hard and takes time. That gratification is also enhanced for management through stock options. If most British managers are happy to sell out to foreign bidders and private equity houses it is because it brings forward the stock options bonanza, he argues.