A newfound appetite for old virtues
As the world of quantitative easing gives way to one of quantitative tightening, companies who can offer little more than a good long-term ‘story’ can no longer rely on capital markets to fund their operating losses. This should give large, established cashflow-positive incumbents an advantage.
At the same time, established companies in certain industries now find that they have an enormous amount of pricing power. As critics of the oil majors have noticed, their profit margins are increasing. And as their margins increase, the bonds and equities of these ‘old fashioned’ companies are becoming ever more attractive for investors, particularly those seeking income. For example, Exxon’s US refineries will generate more profits for their parent company in the second quarter of this year than they did in the previous nine quarters combined. (We currently own shares in ExxonMobil as well as in US-based refiner Philips 66).
It won’t stay this way forever, of course. In time, excess profits will attract capital and new capacity will come online. But it will take years – sometimes decades – to build new refineries, to bring new energy fields online, to build new pipeline networks and to construct new fertiliser factories. In the meantime, we believe the cashflow-positive companies in the real economy will be able to reward their shareholders and bondholders rather more handsomely than loss-making businesses in the metaverse. Cold, hard financial reality has suddenly intruded on our once frictionless world – it might be with us for a little while longer.
