(Reuters) – The main drivers of excessive U.S. company profit margins are unsustainable and “now under threat”, which can ultimately end in a lot lower fairness prices, Bridgewater Associates, the world’s largest hedge fund, stated on Wednesday in a report.
FILE PHOTO: Traders work on the ground of the New York Stock Exchange (NYSE) in New York, U.S., January 29, 2019. REUTERS/Brendan McDermid
“Over the last two decades, U.S. corporate profit margins have surged and have contributed more than half of the excess return of equities relative to cash,” stated Bridgewater, which oversees greater than $160 billion in belongings.
“Without that consistent expansion of margins, U.S. equities would be 40% lower than they are today.”
Over the previous few many years, virtually each main driver of profit margins has improved, Bridgewater stated.
“Labor’s bargaining power fell, corporate taxes fell, tariffs fell, globalization increased, technology allowed for greater scale and lower marginal costs, anti-trust enforcement fell, and interest rates fell. These factors have produced the most pro corporate environment in history. Many of these drivers of high profit margins are now under threat.”
“Some of the forces that supported margins over the last 20 years are unlikely to provide a continued boost,” Bridgewater stated. “Incentives for offshore production have been reduced as global labor costs have moved closer to equilibrium, with domestic costs and rising trade conflict increasing the risk of offshoring, while the potential tax rate arbitrage from moving abroad is now much smaller.”
At the identical time, widespread sentiment has begun to show towards the forces driving company income, in addition to towards the businesses which have benefited most, Bridgewater stated.
“We are in the midst of a populist backlash against rising inequality and increasingly seeing a move toward more protectionism,” it stated within the report. “Recent surveys show increasing animosity toward globalization and the power of companies more broadly and a bit more welcoming attitudes toward government regulation of firms.”
There can also be extra dialogue about taxing mega-profitable companies which have benefited from present authorities insurance policies, it stated.
For instance, Europe’s potential “digital services tax” is explicitly designed to shut the tax arbitrage by introducing a gross sales tax on on-line revenues from residents.
“While the current impact of these proposed rules on the overall profitability of these tech giants is relatively small, they are a straw in the wind that the tide might be turning and that the multi-decade boost from favorable taxation policies is unlikely to be repeated,” Bridgewater stated.
Reporting by Jennifer Ablan; Editing by Sonya Hepinstall