By: SAM RO
Economists and financial market strategists continue to debate whether or not the current high corporate profit margins are sustainable.
“I think margins may be peaking,” chimed in Blackstone’s Byron Wien this week.
One of the most controversial sub-debates in the profit margin debate relates to low rates and how it affects interest expenses.
The profit margin bears argue that record low rates are not sustainable and that rising rates will inevitably reverse recent profitability gains.
However, many market strategists think this is an oversimplistic way of considering the impact of rising rates. They give two reasons.
First, American companies have deleveraged their balance sheets after getting burned by the recent credit crisis.
“[A]lthough we could see interest rates rise from current depressed levels, we would still expect them to remain well below history,” said Bank of America Merrill Lynch’s Dan Suzuki earlier this year. “We also do not see any rush for corporations to meaningfully re-lever their balance sheets for the foreseeable future.”
Second, American companies have locked in lower interest rates.
“The impact of higher rates should be muted, as companies have termed out their debt,” said RBC Capital Markets’ Jonathan Golub.
In other words, companies have refinanced much of their debt in the same way consumers do. Many companies won’t have to worry about seeing surging interest expenses until years after rates rise.
Below is a chart from Morgan Stanley’s Adam Parker showing the maturities of corporate debt. As you can see, it’s not until 2016, 2017, and 2018 that we’ll really have to worry about companies refinancing their liabilities.
The question is. Are the Stock Markets ready?