Yes, according to a weighty piece of work by McKinsey Global Institute, the research arm of the eponymous management consultancy. In Playing to Win: The new global competition for corporate profits, McKinsey's team uses truck-loads of data to ram home a familiar message - that the past 30 years or so have been the best of times for western companies, made possible by the alignment of three beneficial factors:
■ the emergence of a low-cost pool of labour. Between 1980 and 2010, the global labour force rose by 1.2bn, almost all in emerging economies;
■ a fall in the cost of capital. Interest rates saw a secular decline - for example, the yield on 10-year US Treasury bonds was 14.6 per cent in 1982 and is 1.9 per cent today - and rising share prices meant the cost of equity fell;
■ lower rates of corporation tax. Nations have competed to be the friendliest location for multinationals. For example, in the UK rates have more than halved since 1980 from 52 per cent to 20 per cent today.
Combine these factors with rising productivity and the result has been a profits bonanza for companies in general, western companies in particular and, most of all, for multinationals with global reach. The table gives some figures, the most telling of which are that the share of global output accounted for by companies' operating profits rose from 7.6 per cent in 1980 to 9.8 per cent in 2013 and that profits net of interest and taxes have risen even faster, from 4.4 per cent of output in 1980 to 7.6 per cent. In addition, in North America, companies' operating profits widened from 5.6 per cent in 1980 to 9 per cent in 2013; as a result, net profits of US companies hoover up their biggest share of national income since 1929. Meanwhile, the re-enforcing effects of economies of scale meant the big got bigger and 10 per cent of the world's public companies now grab 80 per cent of the profits.
Never had it so good, but...
| 1980 | 2013 | 2025 (E) | |
|---|---|---|---|
| Global operating profits ($' trillion) | 2.4 | 9.5 | 11.7 |
| as % of global GDP | 7.6 | 9.8 | 7.9 |
| Net profits (% global GDP) | 4.4 | 7.6 | 6.0 |
| Emerging economy co's (% global corporate revenue) | 20 | 40 | - |
| Labour's share of national' income in advanced econ's (%) | 76 | 66 | - |
| Share of global company' profits (%): | |||
| Advanced economies companies | - | 68 | 62 |
| Emerging economies companies | - | 32 | 38 |
Source: McKinsey Global Institute
But, reckons McKinsey, this is as good as it gets. These beneficial factors are unwinding and increasingly western multinationals must go head-to-head with serious competitors from emerging economies. These rivals have the built-in advantage that they take a longer-term perspective than western companies because they are often controlled by the state or by founding families. This means they give priority to capturing market share over maximising profits.
McKinsey suggests that western company bosses respond by embracing the disruption brought by new competitors and technologies. For example, the management consultant applauds the decision by Siemens (SIE) of Germany and Eli Lilly (LLY) of the US to set up internal venture-capital funds; and by ExxonMobil (XOM) to combat the inertia that creeps into any organisation by each year identifying 3-5 per cent of its assets that should be sold.
However, if, for western companies, the inexorable trends are erosion of profit margins and loss of market share to rivals from emerging economies, how should UK-based equity investors play this? Three thoughts occur.
■ Do nothing different. This is based on the assumption that whatever an investor is doing already works. The investment criteria may or may not pay heed to what's happening to global profits, but there is no point in changing them until it becomes clear they no longer work and that the failing owes something to the swing of global corporate profits. Of course, identifying this is tough.
■ Gain exposure to the so-called 'global profit harvesters'. These are the outstanding western companies whose merit is that they come with a meaningful exposure to emerging economies; the likes of Procter & Gamble (PG), Diageo (DGE) or Nestlé (NESN:VX) in consumer goods; Schlumberger (SLB), Boeing (BA) or BASF (BAS) in capital goods. The shortcoming of the plan - much a consequence of that merit - is that their shares are usually highly rated.
■ Use collective funds to gain exposure to emerging markets equities. The lower costs of exchange traded funds means that, on average, they will outperform managed funds. But some managed funds may offer advantages that an index tracker can't.
Which of those three paths an investor pursues will depend on experience, confidence and the inclination to invest actively or passively. As it were, you pay your money and you take your choice. But that's always how it is in investing; except that the McKinsey report is free to download from its web site.
