For a long time already, the investments of very large groups around the world have been at their lowest. Never have profit margins, return on invested capital, financing costs and effective tax on profits been so favorable and yet the appetite to invest is lacking.

According to our study, the average return on equity in the last quarter of 2022 was 15.6%, slightly below the long-term average. Considering the economic downturn, that is not bad. The biggest companies thrive without taking risks. Without investing, they manage to increase their value considerably by simply holding cash, buying back their own shares and paying dividends. Raising interest rates by central banks only seems to reinforce this attitude.

Johan Geeroms, our Director Risk Underwriting Benelux: “We see that listed companies have increasingly used their own capital to buy back their own shares over the past decade. One might wonder if there was not something better to do. Apparently not. Indeed, buying back your own shares to possibly destroy them afterwards is extremely profitable. The value of the company increases as the share price rises, as the number of shares over which profits must be distributed has decreased. And in takeovers, as well as in defending your company against a takeover, the higher share price of your own company is an effective weapon. This confers a certain power on the market.

When the economy is booming, there is high demand which pushes up prices and creates inflation. Companies then invest massively because they see opportunities. Today we are in a recession and yet there is inflation. This phenomenon is due to what is known as supply inflation. We are facing high prices, cost push (partly because of the war in Ukraine). Central banks try to curb inflation by raising interest rates, but that does not improve the economic climate. The current status quo could continue for years. This is also what the biggest companies believe. They have thus developed their own way of securing their backs.

Johan Geeroms stresses the importance of business investment, particularly by very large groups, for the economy. "It's the engine of the economy. Investments generate employment and income. They are also essential to technological progress. But they don't restart. Companies have created their own lucrative carousel, which consists of savings, buying back their own shares and paying dividends. Shareholder value is all that matters right now. Clearly, inflation is still going to have to rise significantly before investment picks up.

The big companies don't mind. Why complicate your life when you can opt for the easy? However, there is undeniably a perverse effect. First, there were low interest rates to stimulate the economy. The money was, so to speak, free. Given the uncertain economic climate, there was no rush to invest. This free money still allowed large groups to easily create value. Simply by buying back their own shares. Monetary policy has created an incentive to finance more with borrowed funds. And big companies were the first to take advantage of it.

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