This year looks set to be a significant year for the global economy. Although share prices have generally risen and the mood among investors is rather upbeat, the situation could rapidly change. Higher inflation, greater competition from within a number of industries and modest economic growth could put pressure on a wide range of companies.
As such, those stocks which are able to keep their costs down when compared to industry rivals could deliver impressive capital gains in 2017 and beyond.
Although global inflation has not yet spiked to high levels, there is the potential for it to do so. In the US, higher government spending levels combined with lower taxation could lead to a rise in the rate of inflation. Although the Federal Reserve has thus far been relatively hawkish regarding interest rate rises, time lags could lead to a greater inflation rate occurring in the US and then being exported across the globe.
Similarly, with the Eurozone retaining an ultra-loose monetary policy which includes significant amounts of quantitative easing nearly a decade after the start of the credit crunch, inflation could rise in that region. After ten years of a deflationary cycle, policy initiatives pursued by Central Bankers in recent years may now be about to begin a new era of higher inflation. This could create challenges for companies seeking to keep costs down.
As well as the scope for higher inflation, the world economy also faces modest growth forecasts. While the global macro outlook is relatively upbeat at the present time, the gradual tightening of monetary policy could lead to a slowdown in GDP growth. Demand for new loans from businesses and individuals could decline, and this may lead to lower levels of economic activity over the medium term.
The current debt levels of a range of developed countries may also mean government spending comes under a degree of pressure. This may not occur in the short run, since the focus seems to be on trying to achieve higher rates of growth, but in the long run deficits are unsustainable and debt levels may need to be reduced.
This could mean less stimulus across the developed and developing world, which may equate to a lower economic growth rate. Companies which are able to cut costs now may be beneficiaries in the long run, as they may be able to develop higher margins with superior business models versus their peers.
With higher inflation, modest growth and continuing high competition in a range of industries across the globe, controlling costs could become even more important for a range of businesses. Certainly, keeping costs down has always been of great importance to all companies. But with revenue seemingly unlikely to provide a major catalyst for earnings, buying stocks with a clear plan to cut costs and increase margins now may be a shrewd move.
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