Equity performance affected more by profits than rates: Quay

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MEDIA RELEASE Investors should be less concerned about the impact of interest rates and place greater emphasis on the profit outlook for listed companies, according to Quay Global Investors.

The sentiment comes in the wake of last week’s announcement by the Reserve Bank of Australia that it would cut the official cash rate by 25 basis points to a record low one per cent, and also precedes next month’s reporting season which will see listed entities announce key financials.

Quay’s principal and portfolio manager, Chris Bedingfield, said that at the stock level, if a company earns more profit over time then the share value will increase over time.

“While low debt costs can indeed boost earnings, low interest rates – and low inflation – are not always good news for long term equity investors.

“Our own research, as specialists in listed property, shows no correlation between listed real estate performance and interest rates over the long term,” he said.

Profit growth in the US has increased almost 100 per cent since the financial downturn of 2008, increasing from US$1.03 trillion to US$2.03 trillion. According to Mr Bedingfield, while the US Federal Reserve garners praise for the bull run on equities, market performance has been heavily supported by the sharp increase in corporate earnings over the past decade.

“This is demonstrative of the fact that investors need to spend less time thinking about or predicting what the Fed will do, and more time thinking about the purse strings controlled by Congress,” he said.

In the US, the most recent lift in company earnings – during 2018 – coincided with an increase in government deficit driven largely by tax cuts.

“Despite much handwringing by company CEOs about the sustainability of government finances, companies and their shareholders tend to be major beneficiaries of ongoing budget deficits,” Mr Bedingfield said.

Company profits are assessed using the Kalecki-Levy Profit Equation, a methodology which breaks down the components of company earnings through the accounting relationship between companies, government, households and the external sector.

The outlook for Australian company profits can be gauged by applying the same methodology.

If household savings were to rise (as a result of low interest rates), it does not mean corporate profits must fall as all factors in the economy are fluid. However, Mr Bedingfield believes there are obvious key risks.

“An anaemic investment outlook – which is at risk of deteriorating further in the absence of any meaningful uptick in consumer demand – very much poses a risk to company profits.

“Unless the government proactively increases the deficit, or we continue to improve the external current account deficit, there is a risk that Australian company earnings face material headwind,” he said.


Quay Global Investors is a boutique investment manager focused on the preservation and creation of wealth through innovative strategies in real estate securities.

Quay was launched in May 2015 as a partnership with principals Justin Blaess and Chris Bedingfield, and Bennelong. Prior to this the business operated as Quay Real Estate Advisors, which was founded by Justin and Chris in 2013.

The founding partners have more than 40 years of collective experience in direct property, equities research, investment banking and investment management across domestic and global markets, giving them a unique skill set and perspective which they bring to the management of a portfolio of global real estate securities.

Visit quaygi.com

Established in 2001, Bennelong Funds Management nurtures a growing suite of boutique asset management teams in Australia and, through its wholly-owned subsidiary BennBridge, in the UK. Globally, it has almost $10 billion in funds under management.

It provides a holistic range of services to its boutiques, allowing them to focus on what they do best – manage money. As equity partners in their individual businesses, each asset manager’s goals are aligned with those of their investors.

Bennelong is a wholly owned subsidiary of the Bangarra Group (formerly the Bennelong Group), a privately-owned company encompassing a number of independent businesses.

Visit bennelongfunds.com