EDITOR'S LETTERMerryn Somerset Webb
The world’s big companies have had a happy few decades. Their labour costs have been falling fast; the interest rates they have been paying on their debt have been in free fall; the fund managers who are supposed to monitor their behaviour on behalf of the end owners haven’t bothered to do it; and best of all they have been able more or less to choose the tax rate they want to pay. It’s worked out really well for them so far: profit margins are at, or near, record levels, something that is reflected in their buoyant share prices (and their managements’ similarly buoyant pay packets). Lovely.
But there is trouble ahead. We’ve noted several times here that fiscally desperate governments will eventually find their way to the place where the biggest piles of cash are: multinational balance sheets. You can approve or disapprove of the EU’s raid on Apple (one US senator called it a “cheap money grab”; most European commentators are all for it – see page 17 for the details on this). But the case against Apple boils down to something very simple: money that should be collected (e13bn of it, in this case) looks to be going uncollected and that just doesn’t work for the EU. Look at it like this and you can see, as the FT puts it, that the “scramble to re-tax Apple” has clearly only just begun.
There is no reason why the likes of France, Sweden and Germany couldn’t get in on the same game – and no reason why everyone shouldn’t have a go at re-taxing other multinationals too. After all, they are one of the few groups that can afford to pay. It’s also worth noting, as politicians and pressure groups have, that multinationals can surely afford to pay higher wages too. And that with the political rhetoric on inequality where it is, they may soon have to. Not so lovely (from a profit point of view at least).
The point here is simple: the world’s fund managers all think that multinationals are a safe investment. But they are missing something huge. The main risk to these firms is not operational – that people will stop liking their products, or some such. It is political: that the wave of protectionist rhetoric sweeping the developed world will block their road to domination; that their wage bills might double; that their monetary-policy-driven pension deficit will kill their ability to invest (for more on this, see here) or that their effective tax rate will go up by hundreds of percentage points overnight. Dangerous times.
We will write more about this over the coming months, but if the risk out there is mainly political, we would observe that one of the major things most modern politicians appear to have in common is this: they all profess to be anti-big-business and they all simultaneously claim to be hugely pro-small-business. Time to shift the bias of your portfolio down the size scale perhaps?