Tread carefully in new economic environment: Schroders
Companies need to understand that the change in the world economy is structural rather than cyclical, says Schroders head of Australian equities Martin Conlon.
The double-digit credit growth of the last 20 years and growth of five, six or seven per cent was "not normal", said Conlon.
"That is how we've got to this really aggressively geared stage, and you do not want to extrapolate it when you're running a business," he said.
Instead, companies must realise they are at an "inflexion point" and resist the temptation to increase their leverage in a low interest rate environment, he said.
He gave the example of Woolworths, a company that is continually rolling out new stores in the belief that it will continue to get "like-for-like" sales growth.
"In a deleveraging environment we are adamant that companies should take a sensible approach to leverage and not look at low interest rates as an opportunity to gear themselves up to get some cheap EPS [earnings per share] growth in the short term. The successful ones in the long term, we are very confident, will be the opposite," Conlon said.
In past slowdowns, highly indebted governments have been bailed out by households with low levels of debt, Conlon said. But the structural change in the current environment is that government debt and household debt are both high in many countries, he said.
"Who is that incremental borrower who's going to stimulate the growth that allows governments to pay back their debt so bondholders can get their money back? We can't find them, and most people we talk to can't either," said Conlon.
Recommended for you
Lazard Asset Management has announced the launch of a new global equity fund, expanding its qualitative offering for Australian investors.
After introducing its first active ETF to the Australian market earlier this year, BlackRock is now preparing to launch its first actively managed, income-focused ETF by the end of November.
Milford Australia has welcomed two new funds to market, driven by advisers’ need for more liquid, transparent credit solutions that meet their strong appetite for fixed income solutions.
Perennial Partners has entered into a binding agreement to take a 50 per cent stake in Balmoral Investors and appoint it as the manager of Perennial's microcap strategy.
