Quarterly Bulletin
Investment Articles
| 2008 Q1 | Recent developments in portfolio insurance  (2.2mb) By Darren Pain of the Bank's Foreign Exchange Division and Jonathan Rand of the Bank's Sterling Markets Division. The aim of this article is to describe how portfolio insurance works, the main strategies employed and how these have evolved over recent years, and the possible links between their use and financial market stability. The key benefit of portfolio insurance is that it enables financial risk to be distributed among those agents most willing to absorb it. The downside is that it can possibly create conditions for greater fragility in financial markets and leaves issuers of portfolio insurance exposed to potential unexpectedly high losses. It seems unlikely that portfolio insurance-related investments contributed significantly to the financial market volatility that began in Summer 2007. Nonetheless, it is important to keep alert to situations when portfolio insurance could potentially work to amplify financial market instability. |
| Summer 2006 | Investing in inventories (268k) (By Rob Elder and John Tsoukalas of the Bank's Structural Economic Analysis Division). As well as investing in capital, firms invest in inventories or stocks. For some businesses, investing in stocks is crucial for their profitability. Shops are better able to attract consumers if their shelves are full and they can offer a wide variety of products. Manufacturers are more likely to win contracts if their customers can trust them to cope with sudden swings in their orders by holding sufficient stocks. Nevertheless, investment in stocks is actually a very small proportion of total spending in the United Kingdom. On average between 2000 and 2005 it was just 0.4% of GDP. But it is volatile. For example, annual GDP growth slowed from 3.1% in 2004 to 1.8% in 2005. Weaker investment in stocks can account for 0.4 percentage points (or a third) of that slowdown. This article examines firms' motives for investing in inventories in order to understand the role it plays in swings in whole-economy output. |
| Spring 2005 |
Indicators
of short-term movements in business investment
(230k) (by Sebastian Barnes of the Bank's Structural Economic Analysis Division and Colin Ellis of the Bank's Inflation Report and Bulletin Division). Business surveys provide more timely news about investment than official data. The surveys also include forward-looking information. This article examines some survey-based indicators of business investment. Using simple techniques, several indicators are found to contain information about the path of investment. Moreover, as official business investment data are often revised, survey data can also usefully supplement the official data when interpreting recent movements in investment. |
| Autumn 2003 | Balance
sheet adjustment by UK companies
(104k) (by Philip Bunn and Garry Young of the Bank's Domestic Finance Division). Corporate debt levels in the United Kingdom are currently at an historically high level in relation to the market value of corporate capital. Empirical evidence discussed in this article suggests that this is unlikely to be an equilibrium position and that companies will continue to act so as to strengthen their balance sheets. Much of this adjustment is likely to occur through financial channels, such as reduced dividend payments or increased new equity issues, but it could also occur through more restrained capital investment. Illustrative simulations presented in the article suggest that adjustment tends to be gradual and that it may take several years for balance sheets to return to equilibrium. |
| Summer 2003 | Long-run
equilibrium ratios of business investment to output in the
United Kingdom
(148k) (by Colin Ellis and Charlotta Groth of the Bank's Structural Economic Analysis Division). Over the past 20 years, the constant-price and current-price ratios of business investment to total output have behaved very differently. In this article we use a simple framework to examine how these two ratios should behave in long-run equilibrium. We investigate the conditions in which each ratio will be constant and, more generally, consider how each might evolve over time. |
| Winter 2002 | Profit
expectations and investment
(64k) (by Seamus Mac Gorain of the Bank's Monetary Instruments and Markets Division and Jamie Thompson of the Bank's Structural Economic Analysis Division). This article examines the relationship between expectations of future profits and companies' physical investment. Theory suggests that increased profit expectations should raise share prices as well as investment. But this correlation between investment and share prices may be rather weak if investors' opinions of companies' prospects differ from those of the companies' managers. Using a simple aggregate investment equation, the article illustrates that measures of profit expectations based on current profits and analysts' earnings forecasts appear to be more informative for investment than stock prices themselves. This result is consistent with recent research at the Bank using company data. The external balance sheet of the United Kingdom: recent developments
(98k)(by Robert Westwood of the Bank's Monetary and Financial Statistics Division and John Young of the Bank's Domestic Finance Division). The external balance sheet (or international investment position) gives the most complete picture of the stock position of a country in its financial transactions with the rest of the world. The very breadth of coverage of the data leads inevitably to problems of measurement and valuation. Nevertheless, subject to certain qualifications, the data can throw some light on macroeconomic and financial stability issues related to the United Kingdom's cross-border financial links. This article, one in an annual series, discusses the recent evolution of the United Kingdom's external balance sheet, reviewing along the way some of the main methodological issues that impinge on an interpretation of the data. It concludes that, despite a persistent current account deficit, the balance of probability is that the United Kingdom still has net external assets, or at least the capacity to generate net investment income from overseas. There are also some grounds for optimism that the structure of its assets and liabilities has left the United Kingdom in a fairly strong position to withstand financial shocks. |
| Autumn 2002 | The
balance-sheet information content of UK company profit warnings
(67k) (by Allan Kearns and John Whitley of the Bank's Domestic Finance Division). This article looks at the information content of profit warnings issued by UK private non-financial companies over the period 1997-2001 in relation to measures of their profitability and balance-sheet strength. It finds that profit warnings are associated with a persistent fall in profit margins and that this decline in margins is larger than for companies who do not issue warnings. The article also finds that profit warnings contain incremental information for other balance-sheet variables: those firms who issue warnings are also more likely to see their gearing levels rise, and investment and dividends fall, than other firms whose profit margins also fall but who do not issue a warning. Money and credit in an inflation-targeting regime
(85k)(by Andrew Hauser and Andrew Brigden of the Bank's Monetary Assessment and Strategy Division). This article is one of a series on the UK monetary policy process. It discusses how the assessment of money and credit data fits into the Bank's quarterly forecast round. Monetary statistics are available more rapidly than most other economic data and provide early information on the near-term economic outlook. The analysis on money and credit might be used to adjust some output of the Bank's macroeconometric model. It could also help the MPC to assess the risks around its central projections, reflected in the inflation and GDP fan charts. |
| Summer 2002 | Why
are UK imports so cyclical?
(72k) (by Valerie Herzberg, Maria Sebastia-Barriel and Simon Whitaker of the Bank's Structural Economic Analysis Division). The recent economic slowdown in the United Kingdom has been characterised by declines in business investment and exports. The impact on domestic output has been alleviated by robust household spending, but also by a sharp decline in imports of goods and services. This article shows that these divergent trends in the components of demand, and differences in their import content, can help explain the weakness in imports during 2001. More generally, close attention to the relative contribution of the components to aggregate demand can help explain fluctuations in imports. The analysis has been aided by the recent publication of updated information from the ONS on the import content of different expenditure categories. |
| Spring 2002 | Explaining
trends in UK business investment
(114k) (by Hasan Bakhshi and Jamie Thompson of the Bank's Structural Economic Analysis Division). The ratio of business investment to GDP at constant prices has been trending upwards over the past two decades, picking up sharply in the second half of the 1990s. This article investigates possible explanations. We argue that the rise largely reflects a sustained fall in the relative price of investment goods, given that there is little discernible trend in the current-price ratio. This is consistent with a significant role for rapid technological progress in the investment goods sector and, given the importance of imported investment goods, for exchange rate developments in explaining trends in UK firms' investment behaviour. But other factors, such as falls in the cost of finance and increases in replacement investment, may also have been important. This view is supported by an illustrative model-based analysis. |
| Winter 2001 | Financial
effects on corporate investment in UK business cycles
This article focuses on the potential role of corporate financial health in investment behaviour in the early 1990s. It does so by examining whether the theoretical predictions of a macroeconomic model explicitly designed to allow for interactions between real and financial factors are consistent with features of observed behaviour. This 'financial accelerator model', which includes potential for financial effects, is used as a tool for analysing possible shifts over time in the strength of interactions between corporate financial conditions and investment. Model simulations suggest that financial effects may have been more important in the early 1990s recession than in the 1980s recession. Clearly these simple experiments cannot hope to explain the complexities of investment behaviour in recent recessions: the article does not claim that financial accelerator effects were the single, or even the most important, determinant of corporate investment behaviour in the early 1990s recession. But the model-based results do illustrate that relationships between financial conditions and real behaviour can vary substantially over time. In this way, the exercise highlights the importance of monitoring interactions between corporate financial fragility, finance supply and investment spending. |
| Summer 2001 | Using
surveys of investment intentions This article examines the information that surveys of investment intentions can provide about the future growth of business investment in the UK economy. The first section looks at the components of business investment in detail. The second section outlines the main economic determinants of investment growth. The third section explores surveys of investment intentions, and describes a model of investment that uses these surveys. The fourth section examines the forecast performance of this survey model, and finds that the model provides a useful source of additional information about future business investment. |
| May 2000 | Money,
lending and spending: a study of the UK non-financial corporate
sector and households
(64k) (by Andrew Brigden of the Bank's Stuctural Economic Analysis Division, Alec Chrystal of the Bank's Monetary Assessment and Strategy Division and Paul Mizen, consultant to the Bank's Monetary Assessment and Stategy Division). Many empirical studies over the past three decades or so have reported estimates of the determinants of consumption, investment and the demand for money. This article summarises recent Bank work that seeks to understand more fully the demand for bank and building society loans, and the interactions between these borrowings and the demand for money and decisions to consume and invest. This work aims to enhance our understanding of the links between the monetary sector and real spending decisions. The main aim of this article is to assess whether the data on bank and building society lending to private non-financial corporations (PNFCs) and households contain information that could improve our understanding of the links between monetary policy and aggregate demand. The article demonstrates that it is possible to estimate relationships that explain lending to firms and households, and that lending is driven by the same factors that drive the more intensively researched categories of money demand, consumption and investment. The results have improved our understanding of the links between money and credit and the spending decisions of households and firms. There do appear to be significant interactions between lending to firms and households, and money, consumption and investment. The estimated system of equations potentially gives a framework that helps us to interpret the likely impact of observed credit growth on future spending. These estimates are tentative and require further empirical verification. Notwithstanding these reservations, channels that involve credit as well as money balances appear to matter for the transmission mechanism of monetary policy. |
| February 1998 | Investment in this recovery: an assessment (88k)
(by Simon Whitaker, of the Bank's Structural Economic Analysis Division). Investment has grown less rapidly in this recovery than during the previous one, despite a relatively low user cost of capital, high levels of profitability and high stock market valuations of capital. Part of the reason may have been that firms were correcting for over-optimistic forecasts of demand in the late 1980s. Another possibility is that conventional measures of investment do not capture additions to the productive potential of the economy as accurately as they once did. |
| February 1996 | Saving, investment and real interest rates (70k) (by Nigel Jenkinson of the Bank's Structural Economic Analysis Division). The G10 finance ministries and central banks published, in October 1995, a report of a study of savings, investment and real interest rates. This report describes the study's conclusions and policy recommendations. It also outlines the Bank of England's work supporting the study. |
| August 1994 | Investment appraisal criteria and the impact of low
inflation (26k) (by Andrew Wardlow of the Conjunctural Assessment and Projections Division) looks at the impact of a return to low inflation on corporate investment decision-making. It considers the different investment appraisal criteria used by firms - and the role they give them - and assesses the significance of firms' apparent slowness to adjust. |
