Just when everyone was excited about the prospect of Emmanuel Macron making it to the second round of the French elections where, according to the pollsters who regained a bit of legitimacy on Sunday evening, he’ll swiftly put down the populist uprising spearheaded by Marine Le Pen, SocGen’s Andrew Lapthorne decided to rain on the parade.
See, Lapthorne “has no political expertise,” but what he and his team do know is that “the real problem for equities worldwide is one of high valuations, high expectations, yet still lacklustre growth and ever worrying and mounting levels of leverage.”
Ain’t that a bitch?
Read below as Lapthorne reminds you that when the smallest 50% of US companies are (already) shelling out 30% of their profits to pay interest, rising rates might just be a recipe for disaster.
Global equity markets have gone nowhere for the last couple of months. Politics is highlighted as the main barrier to further progress with Trump yet to deliver on many of his election promises and European investors concerned about the outcome of the French election. With the latter seemingly out of the way, markets are responding positively, much in the same way the Russell 2000 bounced post Trump. We have no political expertise but nonetheless recognise the palpable relief but we also understand the real problem for equities worldwide is one of high valuations, high expectations, yet still lacklustre growth and ever worrying and mounting levels of leverage. As with Trump any euphoria surrounding Macron will rapidly turn to a focus on delivery.
Regular readers will know will have been flagging the US debt issue for a long-time. But for many it is the dog that refuses to bark. But with the IMF in its latest Global Financial Stability report joining the ever increasing list of organisations to be very worried about US corporate leverage, the US corporate debt bubble is likely to regain centre stage.
The problem the US now faces is it has to normalise interest rates, but with the smallest 50% of companies already spending 30% of profits (and at peak EBIT) on interest rate costs, any move upwards is likely to push up interest costs to dangerous levels. If EBIT was also to fall as a consequence, a large number of US companies could quickly find themselves in trouble. But if you fail to normalise rates, what is going to stop US corporates taking on even more debt?