The current subdued investment recovery at a time of record corporate profits as a share of GDP suggests that companies are being run for cash rather than for growth. Indeed, it should be no surprise that several equity markets are offering dividend yields that exceed the yield on ten-year government bonds.
Our chart of the week shows the long-term history of dividend and bond yields in the UK, according to the Barclays Equity-Gilt Study. 2011 has been a watershed because yields have exceeded bond yields – for only the second time in the past 52 years – and perhaps we have returned to an old normal (rather than a so-called new normal). Back in the 1950s equities were seen as yield products, being as utility type assets. It was only from the 1960s that stocks were seen as growth assets, and during the 1970s became partial hedges against inflation. It is thus notable that a new watershed may have been reached and it is therefore no coincidence that the investment products du jour are income funds
- UK dividend and bond yields – back to the old normal
The politicisation of profits
This all raises two important questions: how long can the current situation last and what can governments do about it? There are several options for governments.
First, they can raise corporate taxes, thereby improving government savings at the expense of the corporate sector
Second, they can offer investment incentives to encourage increased capex, as the US has done
The third way out is to try to generate an export boom by weakening the currency (perhaps via quantitative easing, or QE), though in the current feeble global economy it remains to be seen how effective this would be.
Fourth, as suggested by Sir Samuel Brittan in the Financial Times, “there should be an antisavings drive” (though, once again, one could argue that QE serves this purpose). This last option speaks to the concept of financial repression, as coined by Professor Carmen Reinhart, which is the means by which governments will be able to reduce their debt relative to GDP. Such repression may take the form of negative real interest rates, or measures to affect the return on capital, but it will effectively involve a transfer from creditor to debtor.
Given the large surpluses of the corporate sector and the rapid growth in top executive compensation, it could be that “greedy bankers” could give way to the new objects of public scorn – the greedy corporates.
