A thirst for change has been a key driver of profit growth in the US, where the spread between corpo...
A thirst for change has been a key driver of profit growth in the US, where the spread between corporate return on capital and the discount rate remains very favourable, and absolute levels of return are at an all-time high.
This contrasts sharply with the corporate landscape 10 years ago, when most US businesses used any spare cash they had to expand. More efficient use of capital can only be good news at a time when investors are starting to fret about the possibility of rising inflation and taxes. After all, such a scenario would lead to a higher discount rate and consequently hurt US share prices. In this environment, finding companies where management proves its commitment to improving the return on capital can be an attractive solution for stock pickers.
Restructuring has found favour with many US technology companiesand has enabled them to move on after the crash of 2000.
Following the arrival of chief executive Mark Hurd 12 months ago, far-reaching changes at computer giant Hewlett-Packard (HP) have undoubtedly helped earnings. The management's ability to react quickly to the needs of the marketplace has bolstered profits at flash memory card manufacturer SanDisk.
A highly innovative and flexible business, SanDisk adapted quickly to outside influences and is now the world's number one supplier of flash memory cards for must-have products like iPods, digital cameras, Playstation consoles and mobile phones.
Of course, self-help stories such as these are not confined to technology, they can be found across virtually all segments of the US market. It is an exciting time for investors in US equities, mitigated only by uncertain Fed activity.
Finding a neutral Fed policy that will both encourage growth and keep inflation under control is a delicate balancing act. Calling an end to 15 consecutive rate increases is never easy for investors and tends to keep them on the sidelines. Low long-term interest rates have benefited the housing industry over the past five years with home ownership climbing 2% to 69%. Although still near historical lows, 30-year mortgage rates have increased to 6.8% from 5.5% as recently as last June. In response to higher rates and highly-priced houses, demand for new homes has dropped and a cooling of the housing market is underway.
Warren Buffett points out that corporate taxes as a percentage of total taxes are close to an all-time low. Investor taxes at 15% for capital gains and inflation are at a secular low. So the medium-term worry must be the possibility of rising inflation and taxes, thereby raising the discount rate and hurting stock prices. With this backdrop it is important to find self-help stories in stock picking. One way to do this is to find management doing the right thing in creating value by improving return on capital where it has lagged peers.
Technology companies have been restructuring
US interest rates to increase further
Mortgage rates rise
Two global vehicles
'Further plug advice gap'
Must appoint separate CEOs and boards
Advisers do come out well
Will report to Mark Till