by Tom Bradley, Steadyhand Investment Funds
There is lots to worry about these days. Rob Arnott, of fundamental indexing fame, talks about the 3D hurricane - debt, deficits and demographics.
As part of the hurricane, Iāve been questioning how sustainable U.S. corporate profit margins are, given that theyāre near or at record highs. Relative to history, the shareholders are getting a disproportionate share of the spoils (in the form of profits) compared to company employees. (Note: Margins in Europe have recovered since 2009, but not nearly as much as in the U.S. Japan is ... well ... at the bottom of the heap.)
As a contrarian, Iām inclined to think the worm will turn one day and margins will come back to more normal levels, but Iām not so sure now. A recession would give revenues and margins a cyclical hit, but from a longer-term perspective, higher overall profitability may be here for a while.
Larry Lunn and the strategy team at Connor, Clark & Lunn Investment Management captured this theme in a recent research note: ā... profit margins should hold up (new norm) because labour has little bargaining power (excess capacity), productivity is high due to technological innovation, and companies are globally mobile and they remain very cost conscious.ā
In addition, I think continued industry consolidation will help maintain higher margins. As industries get down to a few leading players, thereās a greater chance of pricing discipline. The Canadian banks are a good example of this.
By definition, healthy profits bring with them new competition, but of all the things to worry about, margins have moved down my list. Quality companies will continue to get paid well for their goods and services.
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