CEO Daily: Thursday, April 27
The Federal Reserve left interest rates unchanged at its meeting yesterday, confirming it is in no rush to raise them. The central bank left the door open to a rate increase in June, but some commentators point out that meeting is just a few days before the Brexit referendum in the UK, which could cause market jitters that scare the Fed off again. When in doubt, the central bank is opting to keep rates low.
Seven years of near-zero interest rates have caused investors to chase higher returns in the stock market. But a study out this morning from the McKinsey Global Institute says that quest may become an increasingly futile one in the years ahead.
The report shows that equity returns over the last three decades have been exceptionally high, driven by declining inflation, strong global GDP growth, the rise of China and an exceptional period of corporate profits. Publicly listed North American companies increased their post-tax margins by 65 percent during this period, according to the McKinsey analysis, producing real total returns for investors in the U.S. and Western Europe of 7.9% a year.
But those returns were well above the 100-year average, and are unlikely to be repeated in coming decades, as competition increases from emerging market companies and as technology continues to disrupt traditional business models. Instead, you should expect significantly lower returns to shareholders. “For U.S. and Western European equities, the difference could be between 150 and 400 basis points,” the report concludes.
Bottom line: Goodbye retirement. “A two percentage point difference in average returns over an extended period would mean that a 30-year old today would have to work seven years longer (assuming no increase in life expectancy) or almost double her savings rate in order to live as well in retirement,” says Richard Dobbs, one of the authors of the report.
Enjoy the day. And keep working.
[ceo_attribution author=”Alan Murray” email=”email@example.com” twitter=”alansmurray”
• The Trump Doctrine
Donald Trump's eagerly-awaited foreign policy speech came and went without any major surprises, or without resolving the contradictions that invariably crop up when in drafting an ideologically and strategically consistent plan for defending U.S. interests in a complex world. Trump appeared to be more willing to accommodate others he views as Great Powers such as Russia and China, while warning allies in Europe and Asia about free-riding on U.S. security guarantees. But he also pledged to "be a friend again" and promised a "coherent foreign policy based on American interests and the shared interests of our allies. He also pledged both military and philosophical war on 'radical Islam'. Speaking from a teleprompter and apparently staying on-script throughout, he didn't repeat comments about urging Japan and South Korea to develop their own nuclear weapons. NYT
• Facebook Bucks the Trend
While other tech giants stumble, Facebook powers ahead. Mark Zuckerberg's social network reported a better-than-expected 52% rise in quarterly revenue, thanks to a conspicuously successful mobile app and a push into live video that have attracted new advertisers and encouraged existing ones to boost spending. The company also intends to create a new class of stock in a move that will ensure Zuckerberg retains complete control of the company, and relegate outside shareholders to the status of mere profit-sharers. The model is increasingly fashionable in Silicon Valley, giving founder-owners the freedom to pursue their vision, without outside pressure from activist investors and po-faced institutional investors and other little people who just don't get it. For outsiders, though, it invariably makes investing a bet on the person behind the business, rather than the business itself. Fortune
• So Does Samsung
Another surprise, and one that won't be welcome in Cupertino. Samsung's first-quarter operating profit rose 12% from a year earlier, propelled by strong initial sales for its flagship Galaxy S7 smartphones. The South Korean firm also said its “solid performance” will continue in April-to-June, striking a more optimistic tone about prospects for its handsets and chips businesses despite broadly weaker demand for consumer electronics. This isn't the script we're used to. In a market where global smartphone sales are flatlining (up only 0.2% year-on-year according to IDC), Samsung is defending market share and raising profitability. Meanwhile, Apple is losing market share (from 18.3% to 15.3% in only a year, IDC says) and its revenue is falling. It's one thing to be hit by a sectoral slowdown, quite another to see competitors eat your lunch. Fortune
• Panic Over, for Now
The Federal Reserve isn't the only central bank that's taking a slightly more relaxed view about the economy. The Bank of Japan surprised more or less everyone in financial markets Thursday by leaving its monetary policy levers untouched, after weeks of noises that suggested that it would loosen its stance yet again, and despite putting out fresh forecasts that showed its 2% inflation target further out of reach than ever. That has sent the Nikkei tumbling and the yen hurtling higher against the dollar, and the greenback is now back close to an 18-month low. Governor Haruhiko Kurodawill be hoping that the Fed drops enough hints about future rate rises to put a lid on the yen and spare his export sector. At his press conference, he again appeared close to admitting that the BoJ is out of ammunition, ruling out the creation of 'helicopter money', and seeming reluctant to risk the health of Japan's banks by cutting interest rates further into negative territory. WSJ, susbscription required
Around the Water Cooler
• Sanofi Makes its Move for Medivation
Olivier Brandicourt has taken the plunge and gone public with a $9.3 billion hostile bid for Californian cancer drug specialist Medivation, which has told him very bluntly to take a hike, despite the offer being 50% above where the stock was trading before speculation about a deal started. It's the kind of deal that Brandicourt's predecessor Chris Viehbacher used to shun: he believed that direct control by an established and necessarily bureaucratic pharma giant like Sanofi tended to stifle the innovative skills that made biotech companies attractive in the first place. Sanofi's shares are down this morning, reflecting concerns that it's going to be sucked into paying an even higher price for the growth that it's struggling to generate organically. Fortune
• The Martian
Elon Musk continues to pursue his life goal of colonizing Mars. The SpaceX founder said in a series of tweets Wednesday that he aims to send an unmanned mission to the red planet as early as 2018, prompting speculation that SpaceX has made some substantial progress in overcoming the problems that have dogged its heavy-lift Falcon 9 rocket. But lest we all get carried away with mental images of Matt Damon, Musk also added that the craft couldn’t take astronauts: the inside space will be only about as big as that of an SUV, hence “not much fun” for people on a six-month round trip. As always, it's hard to know with Musk where visionary entrepreneurialism ends and attention-seeking showmanship begins. From a commercial point of view, the announcement yesterday that SpaceX has broken the Boeing/Lockheed stranglehold on military space launches is surely more important. But his determination to push boundaries and force the unthinkable to become reality never fails to impress. WSJ, subscription required •
Don't Pay More, Trust More
A new study out from advisory firm LRN finds that companies that give their workers more autonomy do better than those that don't. Those organizations deemed “self-governing”—defined by LRN as companies in which “employees are inspired by a desire for significance and encouraged to act as leaders regardless of role”—outperform their peers, measured by a yardstick that combines market share, customer satisfaction, employee engagement, and the longer-term sustainability of the business. What’s more, “high trust” organizations were 11 times as likely to be called more innovative than their competitors. "What were once considered 'soft skills' are becoming the new hard currency," says LRN CEO Dov Seidman. The industries with the highest amount of trust were “computers/electronics,” followed by “software/Internet.” Coming in last? Government. Fortune
• Nice Work If You Can Get It
Martin Winterkorn, the man who left Volkswagen under a cloud in September even though the board said it believed his protestations of innocence about the emissions scandal, took home €7.3 million ($8.3 million) last year. The company that has made half-hearted admissions and corrections its trademark said last week that top managers would take a 30% cut in their bonuses for last year, in which a €16.2 billion hit from the diesel emissions scandal drove the company to a net loss of €1.6 billion, its worst result in its 79-year history. The company was presenting its annual report in Germany earlier Thursday, after reclaiming top spot as the world's biggest automaker by unit sales in the first quarter. That's happened for two reasons: it's done well in China, where it sells many more cars than in the U.S., and Toyota has struggled with production issues. <em>Der Spiegel, </em>German