Saturday, December 1, 2012

Citigroup: Quantitative Easing backfired

After analyzing what actually happened as a result of quantitative easing and not what the Fed hoped would happen, Citigroup concluded that the policy isn't working as investors are looking for dividends rather than investing in companies that are investing in the real economy.

According to a Bloomberg article,

Worldwide quantitative easing may be making investors richer rather than encouraging business investment, according to Citigroup Inc. (C) 
Fulfilling the goals of central bankers such as Federal Reserve Chairman Ben S. Bernanke, ultra-low interest rates and bond purchases are encouraging investors to buy stocks. Policy makers’ intent was that asset prices and wealth would rise, encouraging consumers and businesses to spend more. 
The sticking point is the particular equities investors are favoringRobert Buckland, Citigroup’s London-based chief global equity strategist, said in a Nov. 21 report. His research suggests they tend to choose companies that issue dividends and buy back shares rather than those that invest in the economy. 
“They’ll take a bigger dividend over a new factory, anytime,” Buckland wrote. “Policy makers may succeed in forcing capital into equities, but from their perspective, it is the wrong kind of capital: income seeking rather than growth seeking.”
Regular readers know that the capital is not growth seeking because individuals like companies can see their is no demand and plenty of excess capacity.  What drives this lack of demand is the zero interest rate and quantitative easing policies.
U.S. companies spent $650 billion on share buybacks and dividends in 2011, compared with $580 billion for capital spending, the report said. In Europe, Citigroup found, the sectors that spent the most capital were given the lowest stock valuations by investors. 
Executives are reacting to the incentives in a bid to encourage stock outperformance, Buckland said. Healthcare companies are cutting back on research, freeing up cash for dividends, for example. Telecommunications businesses now have the highest dividend yield and payout ratio of all sectors. 
Buckland also found dividend funds have replaced growth- oriented emerging market funds as the best-selling equity products. 

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