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.
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