PARIS (Reuters) - Encouraged by years of central bank easing, investors are ploughing too much cash into unproductive and increasingly speculative investments while shunning businesses building economic growth, the OECD warned on Wednesday.
In its first Business and Finance Outlook, the Organisation for Economic Cooperation and Development highlighted a growing divergence between investors rushing into ever riskier assets while companies remain too risk-averse to make investments.
It urged regulators to keep a close eye on investors as they piled into leveraged hedge funds and private equity and poured cash into illiquid assets like high-yield corporate bonds.
Meanwhile, judging by stock market returns, investors were rewarding corporate managers focused on share-buybacks, dividends, mergers and acquisitions rather than those CEOS betting on long-term investment in research and development.
“Stock markets in advanced economies are punishing firms that invest,” OECD secretary general Angel Gurria said in a presentation of the report. “The incentives are skewed.”
According to the OECD’s research, over the 2009-2014 period buying US shares in companies with a low investment spending while selling those with high capital expenditure would have added 50 percent to an investor’s portfolio.
Fidelity Worldwide chief investment officer for equities Dominic Rossi begged to differ with the OECD’s pessimism on corporate 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 said, adding however that it was lower in the Unites States than in other countries.
The OECD joined the International Monetary Fund and some central bankers in voicing concerns that rock-bottom interest rates may prevent life insurers and pension funds from living up to promised guarantees, potentially threatening their solvency.
Antoine Lissowski, deputy CEO of French life insurer CNP Assurances, said that the industry needed to shift clients away from products promising guaranteed returns toward unit-linked investments, which makes clients bear more risk.
“In the course of the coming years we will have to change the economic model of the company,” he told the conference.
But with vast amounts of cash to invest, the ball was in the court of debt issuers, who the OECD said were slashing covenants in bond issues designed to protect investors.
ECB governing council member Klaas Knot said that exceptionally loose monetary policy risked creating dangerous bubbles if it was maintained too long.
“Monetary policy accommodation is now reaching its limits and if it is maintained for a significant period of time it also comes with the risk of certain negative side-effects such as new financial imbalances,” he said.
Reporting by Leigh Thomas