Investors need to place greater emphasis on the profit outlook for listed companies rather than concerning themselves with interest rate impacts, according to Quay Global Investors.
The global markets are currently in a low interest rate environment with Australia being the sixth lowest after the recent RBA cash rates.
The official cash rate of Australia is now at 1 per cent, with some experts predicting it will keep falling, but Quay’s principal and portfolio manager Chris Bedingfield said that, at the stock level, profit earnings over time were more important.
“While low debt costs can indeed boost earnings, low interest rates – and low inflation – are not always good news for long-term equity investors.
“Our own research, as specialists in listed property, shows no correlation between listed real estate performance and interest rates over the long term,” he said.
Quay Global uses the Kalecki-Levy Profit Equation in the US, which is a methodology to break down the components of earnings through the relationship between companies, government, households and the external sector.
The same methodology can be applied to Australia. If household savings were to rise due to low rates, it does not mean corporate profits must fall as all factors in the economy are fluid.
“An anaemic investment outlook – which is at risk of deteriorating further in the absence of any meaningful uptick in consumer demand – very much poses a risk to company profits.
“Unless the government proactively increases the deficit, or we continue to improve the external current account deficit, there is a risk that Australian company earnings face material headwind,” said Mr Bedingfield.
In the US, profit growth has increased almost 100 per cent since the 2008 downturn, and while the US Federal Reserve garners praise for the equities bull run, market performance has been supported by the increase in corporate earnings.
“This is demonstrative of the fact that investors need to spend less time thinking about or predicting what the Fed will do, and more time thinking about the purse strings controlled by Congress,” said Mr Bedingfield.
Mr Bedingfield said the most recent lift in company earnings in the US coincided with an increase in deficit driven by government tax cuts.
“Despite much hand-wringing by company CEOs about the sustainability of government finances, companies and their shareholders tend to be major beneficiaries of ongoing budget deficits,” Mr Bedingfield said.