Ultra-cheap money had fuelled excessive speculations in risky assets — for instance, stocks without viable business models — and rewarded companies that expanded aggressively, including those with a “growth at all costs” strategy. Cheap money also distorted the efficiency of capital allocations — lowering the hurdle rates for investments (leading to unproductive and less productive investments) and sustained many zombie companies. Zombie companies are uncompetitive but kept afloat with the infusion of borrowings and low debt servicing costs.
This week, we are revisiting some basics in fundamental investing. We think it is timely, given the sea change in the macroeconomic environment. The world had, particularly in the past two decades, benefited greatly from cheap labour and cheap goods driven by globalisation, as well as cheap energy, thanks to the shale revolution — the combined result of which was years of low inflation that, in turn, drove the secular downtrend in interest rates. But this broad decline in interest rates — especially since the global financial crisis up till the Covid-19 pandemic — has ended, at least for the foreseeable future.
Globally, inflation is at a multi-decades high and looking to be stickier than most have expected. That would, in turn, keep interest rates higher for longer (though still relatively low by historical standards). Many still expect central banks to cut interest rates, once inflation is brought back under control. It may be so, but odds are that they may not return to pre-pandemic lows for some years. This would mean the period of ultra-cheap money is over, and that has broad implications for businesses and investors alike.
