Tectonic shifts in the world economy are undermining the foundations of some of the world’s largest companies potentially placing their long-term sustainability in doubt.
For valuations and dividends to increase over time listed companies need to grow their revenues and profits.
Yet dividend cover – a measure of cash available for pay-outs -- of the FTSE-100 is a rather slim 1.2 times. Dividends are therefore vulnerable with earnings flat lining. Some of this can be explained by cyclical factors, such as the meltdown in commodity prices and problems in emerging markets.
But far more potent forces are at work.
Two major trends shaping the world economy
The 2007/8 financial crisis crushed notions of stability leaving in its wake a fluid environment characterised by permanent uncertainty.
Digital technologies are disrupting business models and driving down prices of goods, services and in some cases wages across the economy. Eventually, the digital revolution will find an equilibrium.
Notable large cap winners from this trend are Facebook, Amazon, Netflix and Google. They’re either disrupting industries or providing the platform for others to do so.
But far more troubling is what’s happening with demographics. The world’s population is ageing “without parallel in human history” to cite the UN. The population older than 65 will rise from 12% today to 35% by the end of the Century. This trend is particularly pronounced in developed countries, China and Russia and will greatly influence consumption patterns.
These two trends are not recent and their full impact was likely muted by the trend in falling interest rates since the early eighties and soaring credit growth in the run-up to 2007. But it appears the world economy has exhausted this avenue of growth, particularly the two largest economies, the US and China.
Desperately seeking a new growth formula…
This has left many of the giant multinationals forged in very different eras adrift. This is worrying because they form the bulk of the popular dividend champions and aristocrats.
The growth potential of many of these companies closely mirrors that of the global economy. Growth since the financial crisis has hardly been spectacular leaning heavily on the most gigantic monetary stimulus of all time involving $7 trillion of central bank quantitative easing.
According to the OECD, global GDP growth will be a pedestrian 2.9% this year, but estimates it will hit 3.3% in 2016, compared with 5.7% in 2007.
Japan could be…
