The Map of Global Corporate Debt and the Dance of Interest Rates – Alex Fusti's Flash Note

Despite the corporate influence in United State While moderating since 2020, US companies still have a relatively high level of debt-to-equity ratios by historical standards. A fact that could backfire if a renewed increase in consumer-driven spending ignites inflation. The resulting higher rates would lead to the dreaded “higher for longer“Which would reveal this weakness of American companies that are excessively leveraged. On the other hand, the Fed's slow and steady cycle of cuts would lead to a very favorable scenario for these companies.

EuropeOn the contrary, even today we have a debt level similar to that of American companies, It is at a historically low level. This means that, on the one hand, European companies tend to be more structurally leveraged companies, but the fact that they currently have a low level of leverage (compared to their historical norms) means that European companies will be less vulnerable to bankruptcy scenarios. “higher for longer“The other side of the coin is that greater leverage in Europe comes at a huge cost in terms of much lower growth today compared to the US. This is a fact that will continue for some time and should be reflected in the dynamics of growth in earnings per share. For Europe we expect this +4.4%. year, while for the United States we expect +9.9%.And as those who know this say: “There is no free lunch.”

For its part, the emerging business world does not present problems with over-indebtedness, which makes it less vulnerable to any external shock. This would explain why these markets perform well in the Fed rate hike cycle, unlike other monetary tightening cycles.