It is probably a function of the human condition to think that current conditions are not “normal”. However, that view has probably been the case for the majority of mankind’s time as a sentient being. If it wasn’t fear of marauding Vikings or nuclear obliteration there were countless other things to fret about.
Right now we are probably concerned less about our physical safety than our financial security. This is a little odd because the UK and the global economy have been recovering reasonably well since the great crash of 2008. In large part that has been because interest rates all over the developed world have been cut to as low as possible. If you have access to funding the cost of money has never been lower and the evidence for that can be found in sky-high property values in desirable parts of the world like New York and London. It is also evident in demanding ratings for some of the more sought after, so-called, quality companies.
Société Générale, a French investment bank, says these quality stocks have been outperforming value stocks since late summer 2014 and that the median valuation of US and European stocks, measured by price earnings ratios or enterprise value to earnings before interest, tax and depreciation (EBITDA) have rarely been higher.
Although interest rates have never been lower debt, particularly corporate debt in the US, has hit new peaks. Société Générale points out that net debt for the S&P 1500 ex financials is at its highest ever and that net debt for companies in the Russell 2000 index has quadrupled in six years. In both indices EBITDA stopped growing in the last few years meaning that debt as a percentage of assets and equity has grown sharply. Clearly the debt has not been accumulated to grow the businesses.
Instead it has been spent on share –buybacks. This directly impacts earnings per share in a positive way. If companies cannot increase the denominator in this formula by increasing earnings they can at least shrink the numerator by reducing the number of shares in issue and thus meet their EPS targets for bonuses that way. And it is a similar, though not quite so extreme story, in the UK.
It is perhaps not surprising that the formation of prodigious amounts of money by…
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Rob Davies
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