Absence of gearing creates attraction
Low levels of gearing and solid organic growth have seen a number of companies flourish in recent months, according to Hyperion Asset Management.
Chief investment officer for Hyperion Mark Arnold believes that following the global financial crisis the credit cycle has favoured these companies, which are now offering a strong, long-term return advantage.
"Access to cheap debt in the decades prior to the GFC resulted in an explosion in the earnings growth rates of mediocre companies," he said.
"Both businesses and consumers were encouraged to gear up and increase spending on consumption and investment, and strong earnings and dividend growth over multi-year periods appeared to be the norm."
Arnold said that businesses with strong fundamentals didn't stand out, largely because even the most average companies were achieving strong short-term earnings growth.
However, Arnold suggested that subdued investor confidence had resulted in market-wide deleveraging which, due to depressed investment markets globally, was unlikely to reverse substantially in the near future.
"GDP and profit growth are likely to be below the levels experienced over the past 50 years," he said.
"Now is the time that we are starting to see the better quality companies shine.
"Capital-light businesses with long-term organic growth options should outperform in a subdued economic environment."
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