Growing in a slowing world
In a globalized economy, an investor’s cost of capital is simply the return they can expect from average stock market growth – which, over the long term, aligns with global economic growth – plus dividend distributions.
This growth has been declining in real terms over the past 40 years and is expected to continue decreasing over the next 30 years. In an environment of declining average economic growth and falling real costs of capital, a company that maintains the same (real) growth rate creates increasing value. Its valuation multiples increase.
The resurgence of inflation introduces another dimension to this phenomenon. Beyond masking declining economic growth and the cost of capital in real terms, inflation impacts businesses differently across industries and regions. For a large company with long-term growth, maintaining its historical growth rate in real terms is already challenging when global economic expansion slows. Even in nominal terms (including inflation), this will not be sufficient. Inflation will have to be translated back into revenue growth if multiples are to be maintained, and growth accelerated beyond the real growth rate. Market leaders will succeed in doing so. Further value creation must come from increased EBIT growth – not just potential re-rating.