Profits And Investments - What Drives What? Motilal Oswal's Analysis
Corporate profitability across the globe has witnessed a renewed vigor post-Covid.
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Motilal Oswal Report
Over the years, the financial fraternity is deeply engrossed in finding a suitable answer to the quintessential conundrum of profits and investments: What drives what? Our analysis in this report tries to seek the most suitable answer to this riddle.
Corporate profitability (CP) across the globe has witnessed a renewed vigor post-Covid. This has led to a narrative that capex revival is imminent. However, in this note, we discuss that while higher investments certainly lead to higher profits, the relationship may not hold the other way round.
Using global data for the past four decades, we present evidences of this flawed argument. Higher CP failed to lead to higher investments during the past three decades, and is unlikely to change in the 2020’s decade too.
Global CP (excluding China) increased from 5.1% of gross domestic product in the 1980s to 5.9% in the 1990s to 7.8% in the 2000’s decade and further to 8.7% of GDP in the 2010’s decade.
Simultaneously, global investments (ex-China) declined from 24.7% of GDP to 23.9% to 23.1% and further to 22.3% of GDP during the corresponding decades.
More importantly, corporate investments declined almost continuously from 15% in the 1980s to 13.5% of GDP in the 2000’s decade and increased only slightly to 13.7% in the 2010’s decade.
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