Bridgewater Associates, a multi-strategy investment firm, founded and manged by a famous billionaire investor, Ray Dalio, has just published three research reports – Peak Profit Margins? A Global Perspective (which you can download below), Peak Profit Margins? – A US Perspective (download here), and Geographic Diversification Can Be a Lifesaver (track down here). In its Peak Profit Margins? A Global Perspective Research Report, the fund share its views of the profits margins in global equities.
In Peak Profit Margins? A US Perspective, we discussed the secular rise in US profit margins and our view that many of the forces that have driven those margin increases should not be extrapolated forward. Without that consistent expansion of margins, US equities would be 40% lower than they are today. Margins have been rising for 25 years, and when we look at market pricing, it appears to us that the market is extrapolating further margin gains.
The long-term valuation of US equities hinges heavily on what happens to margins going forward: if margin gains can be extrapolated, then valuations look reasonable; if margins stagnate, then valuations are a bit expensive but not terrible; if margins revert toward historical averages, then US equities are highly overvalued. In today’s research paper, we will share some perspectives on the margin picture in global equities and some thoughts on the clues offered by the differences across equity markets. While this picture is one of many influences we consider when forming our tactical views, it is of paramount importance for strategic investors relying on longer-term equity returns.
When we expand the margin analysis globally, we see that many of the forces that supported US profit margins over the past two decades have similarly buoyed profit margins across most other developed economies. Corporations around the world simultaneously benefited from the broad-based decline in labor’s bargaining power, increased globalization, lower anti-trust enforcement, technology allowing for greater scale and lower marginal costs, and lower corporate taxes, interest rates, and tariffs. These factors have produced the most pro-corporate environment in history globally, with the US benefiting the most. China has been the major exception, as it was on the other side of the global outsourcing wave and saw its profit margins erode as its labor got bid up in the competition to serve Western demand. These differences, which we analyze below, help provide some clues on how much each driver has affected global margins.
You can download a copy of Bridgewater Associates’s Research Report – Peak Profit Margins? A Global Perspective here: